Inlation adjusted Dow 1906 to 1985

[Indices]

Stone, if you want a great argument as to why indexing works, I would read "Commonsense on Mutual Funds" by John Bogle. It's really one of the best books out there. Ignore his advice on why the stock market is a guaranteed return maker however.

[Lone Wolf]

Lone Wolf, I've just looked up the BRK versus the SP500 charts and I'm struggling to see the lagging behind the index that you're talking about. It seems to do better over 1year, 5years and 10 years

You're right, stone, the article I was recalling was using the Russell 2000 small cap index to declare Berkshire a ten-year laggard.  I had forgotten that.

That's not a fair comparison on my part since when people speak of "the market" they usually mean the S&P or the total US stock market, not small caps.  Sorry about that.  Here's a pro-Berkshire article that mentions this, if you are curious.

[moda0306]

This board is quality.  All I've got to say.  Good weekend to all.

[stone]

Indices and Lone Wolf, I totally concure that "picking winners" is very very hard and I'm not claiming that it is realistic to hope to do that. All I'm claiming is that it is feasible to harvest random noise in oscilating stock prices. Go back to my example of Merck and Microsoft. I totally agree that it is extremely hard to tell which is currently best value. Instead just keep equal amounts of each. When ever you add to your stock part of the PP, add amounts such as to top up so that you regain parity between the two stocks. Then you will inevitably be buying low so long as both stocks have equivalent long term prospects. It all rests on the idea that most of the price oscilation is just random noise and is not indicative of a long term price trend. If you cast an eye over what stock prices do then that looks how it is. It also makes sense when you think how share buybacks followed by reissues of more stock must work. Are they not just a way to cause a transient price spikes?

[magneto]

Have to concur with Stone.  While holding market trackers I also hold twenty or so UK Investment Trusts (closed end funds).  With one exception the Investment Trusts have outperformed the market both in the last 12 months and since 2000.

I have no axe to grind for ITs, and if market trackers outperformed the ITs then I would hold more in trackers.

The reason for the outperformance may be that the closed end structure involves no selling or buying of stocks within the trust as investors come and go, whereas open ended funds such as trackers are constantly buying and selling to meet demand thereby incurring costs. 

Another factor is that ITs are allowed to leverage when markets seem attractive.

[stone]

Am I right in understanding that the tech bubble at the end of the 1990s was (as the name suggests) all about the tech stocks? Other sorts of stocks were not bubbling up at that time. Infact stocks such as CocaCola KO were dipping as everyone rushed headlong into things like Yahoo YHOO. Using an index tracker would have meant that you would not have been selling off your YHOO exposure anything like as fast as was appropriate considering its ballistic ascent. Also as you were selling off "stocks" as an asset class you were inadvertently selling off KO even though KO had dipped and represented great value in 1999. If, instead of having an index tracker, you had had 2.5% of the PP as YHOO and 2.5% as KO (and another 20% between eight other stocks); then, as YHOO went ballistic, you would have been shedding it as fast as it rose. When it popped, you would only have had 2.5% of you PP popping as compared to the index tracker scenario where techstocks had bloated up to being a ludicrous proportion of the 25% stock allocation.
Banks in Ireland or Iceland or the UK in 2007 would be another example. It made no sense for a UK investor to be selling off GSK just because the likes of BARC were bubbling up.

[christina]

Gumby,

I guess since possible outcomes and diversification are obviously linked, I'm simply taking it to the next level.  Maybe I should be saying that they should be acknowledging a broader set of possibilities, and that's where their intelligence is faltering.   Since that's the source concern behind diversification, you're really getting to the core of the issue.

My point was more that we shouldn't be giving them too much credit just because they index.  It's smart in the same way tax-efficient investing is smart, or estate planning is smart, or shopping for good interest rates on a mortgage is smart.  If you have failed to understand the huge weaknesses of your indexed portfolio due to the potential for negative economic events, then the fact that you've indexed is almost completely irrelevant.

For instance, a 100% index stock investor was hardly in a good spot vs a managed fund investor (most likely) in 1929 or 2008.  Indexing is important, but far-less so than fully understanding the diverse economic circumstance we may encounter.  Better, Gumby?

Yes, exactly. And I do not think they are willing to consider diverse economic circumstances. That has become clear to me. Their excuse seems to be that the discussion would involve central banks, and central banks are a political topic that cannot be discussed on their forum. So, not only are they unwilling to consider diverse economic circumstances, but their forum rules prevent them from actually discussing it!

I thought they were extremely childish and rude. Quite honestly, I've never seen anything like it.

[MediumTex]

I thought they were extremely childish and rude. Quite honestly, I've never seen anything like it.

It reminds me of the line about how hard it is to convince someone of something when their livelihood depends on remaining unaware of it.

There is a whole worldview over there that the PP challenges.  No one should be surprised that they resist what we think of as obvious.