Another book question

[moondogg]

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Ben Graham's "The Intelligent Investor" has a new edition, with commentary added by Jason Zweig and it's only $10.85 on Amazon. This book is one of the best introductions on how to invest in stocks, and Jason's commentary really updates it well.

More detailed information on how to analyse individual stocks and bonds can be found in Graham & Dodd's "Security Analysis", which is the bible for fundamental analysis of a company's true worth. This book is much more expensive, lengthy, difficult to read, etc, but well worth it once you are ready.

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Didn't Graham, later in life, admit that his securities analysis techniques no longer worked -- Too many eyeballs processing the same information.

To outperform, you need either inside information or access to the trading desks at the big brokerage houses.

I prefer to believe this guy who isn't trying to sell me anything and isn't trying to generate a sales commission

Fama and French have a bunch of Nobel prize winning economists they run around with who say the same thing,

Good luck, sounds like you are gonna need it.

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Getting business and investment advice from a Ph.D. is like getting sex advice from a priest.

If these guys say they are not in it for the money, I question their motivation, honesty, and sanity.

[rockrock]

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There were a lot of people involved with LTCM and their demise. I hardly think the blame lies at their feet.

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Yes, it does. Merton and Scholes were founding partners of LTCM (along with John Meriwether) and actively planned LTCM's strategies. They actively solicited investors for LTCM. They don't deserve all the blame, just a huge portion of it.

If they were trying to prove that academics can't beat the market without taking excess risk, they were a huge success. Of course, Buffett knows how, which is why he declined to invest in LTCM.

And after reading my other replies, I guess you realized your Efficient Market mantra was out of date and just plain wrong, which is why you don't have any real response.

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To be honest I don't know enough about LTCM but plan on reading When Genius Failed to find out.

Effecient Market Hypothess is hardly dead and I am not sure what lack of responses you are referring to.

I believe the market to be effecient for the individual investor. He is up against too much information, too many eyeballs and too much money to win.

He is virtually guaranteed to fail against the indexes.

[rockrock]

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The big brokerage houses have "black boxes" generating amazing trading profits (see Goldman blowout quarter for example).

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I thought your arguing about long term investment methodologies... now you refer to GS Quarterly trading results generated by short term trading???

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I am arguing against long term ACTIVE management (i.e. buying a selling individual stocks in an investment portfolio).

The active style will lose because the individual investor doesn't have enough information to win.

[rockrock]

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The average investor is competing with literally hunderds of billions of dollars seeking seeking to buy value stocks (and all other kinds of stocks as well).


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Individual investors are far more nimble than large funds can ever hope to be. Individual investors can take risks that funds can't.

Don't forget, the guys running these funds also don't have crystal balls, they are just individual investors with alot more money to work with and a larger support system, which gives them the disadvantage of higher costs to do what you can do rather cheaply, with only an investment of your time.

If you can identify the same opportunites as these funds do, before or slightly after they identify them, you will be very rich very quickly by riding their buying [img]/images/graemlins/wink.gif[/img]

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How delusional and arrogant to think could do better.

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It is not arrogant, or delusional to think that an individual investor willing to put in the time, can and will outperform mutual fund managers... in fact, it is fairly close to a sure thing.

I personally know many long term investors that outperform the indexes, and I actively trade with many short term traders that are absolutely killing the markets!

My knowledge is based in reality, not some theoretical argument by someone who wrote a book [img]/images/graemlins/wink.gif[/img]

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You use index funds and mutual funds interchangeable above. I assume you meant plain index funds in both cases and not actively managed funds.

They beat what index? The S&P 500?

Big deal. Here is a list of off the top of my head of outperforming asset classes vs the S&P in the past few years: All small caps, large cap value, all midcaps, real estate, pacific (VPL, EPP), emerging markets, international small cap.

Anyone trading in those asset classes have probably beat the S&P but default. Not because they are geniuses but because the asset class outperformed. it has nothing to do with any bood they read or any analysis they did.

In other words how have they done relative to the indexes of the stocks they trade? I doubt you know "many people"

A perfect example of this is the motley fool and their newsletter Hidden Gems. They peddle this newsletter like its tomorrow's newspaper. The truth is most of the picks are small caps, and small caps have killed large caps for a while now.

The end result is that investors look like geniuses, when the real question is how did they perform versus the underlying asset class of the securities/

[DesertCat]

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I believe the market to be effecient for the individual investor. He is up against too much information, too many eyeballs and too much money to win.

He is virtually guaranteed to fail against the indexes.

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I'm an invidual investor. I've never had a losing year, never trailed the indexes, in fact on average I'm beating indexes by over 30% a year. Warren Buffett himself has promised that if he only had to manage $1M, he would guarantee 50% annual returns.

You don't understand how much inefficiency is in the small cap and micro-cap arena. A disciplined value investor can achieve some amazing returns with a small portfolio.

I'm not saying it's easy. It's nearly a full time job for me, and my advice to other investors is typically the same as yours, buy index funds. But I just hate your use of the words "virtually guaranteed to fail", when there are thousands of investors like me beating the market intelligently with low risk, using nothing more than Ben Graham's and Warren Buffett's guidance and teachings.

[midas]

Rock-

You point about individual investors not having enough information is completely wrong.

At this point in time, individuals can access all the information that a research analyst, hedge fund or other brokerage house trader has at their fingertips. Most individuals choose not to access this info or don't do their homework. That's why 99% of individual investors are dead money and can never beat the indexes over the long term.

Your claims are bold, your thoughts are interesting. If you care to share your background, I'd appreciate it. You seem well-read in finance and investing.

You accept the reality that one can, with skill, daytrade(well, intraday or short term I assume) profitably. But you go on to state that long term investing for the individual is a sham and cite an inability to overcome EMH.

This is confusing because you state that Goldman's black boxes, hedge funds, insider info, etc. can overcome the EMH - it appears that you made this argument to support the idea that while powerhouses can profit in the long run, individuals who don't have the info, can't. But these activities you mention are short term in nature. Stevie Cohen is making quick short term moves once he gets word from his friendly insiders what's up. Black boxes can do a variety of things, but the most powerful and active are short term - you know, those spoofs on the ECNs that headfake you, or the market making algorithms, and all the crap going on with boxes in the ES(S&P futures). Look to Jim Simmons and RenTech, I know they love automated short term strategies on futures markets.

I must ask though, what exactly is the time frame you are referring to for an individual that is actively buying and selling stocks in an investment portfolio? The SEC states that pattern daytrading is 4 or more roundtrips in one consecutive 5 day period, or something like that. I don't daytrade stocks, but I believe it's close to that. Are you saying that an individual who has a multi-week or multi-month strategy is just fooling himself?

Once you explain this, I will be able to better understand where you are coming from and give a more thorough response.

[rockrock]

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I believe the market to be effecient for the individual investor. He is up against too much information, too many eyeballs and too much money to win.

He is virtually guaranteed to fail against the indexes.

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I'm an invidual investor. I've never had a losing year, never trailed the indexes, in fact on average I'm beating indexes by over 30% a year. Warren Buffett himself has promised that if he only had to manage $1M, he would guarantee 50% annual returns.

You don't understand how much inefficiency is in the small cap and micro-cap arena. A disciplined value investor can achieve some amazing returns with a small portfolio.

I'm not saying it's easy. It's nearly a full time job for me, and my advice to other investors is typically the same as yours, buy index funds. But I just hate your use of the words "virtually guaranteed to fail", when there are thousands of investors like me beating the market intelligently with low risk, using nothing more than Ben Graham's and Warren Buffett's guidance and teachings.

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Beating what market? What index???

The truth of the matter is that someone is always going to be beating their benchmark. A good example of this is top performing mutual fund listings. The top performing mutual funds in their respective categories is never an index fund but its virtually never the same fund year after year.

[rockrock]

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You accept the reality that one can, with skill, daytrade(well, intraday or short term I assume) profitably. But you go on to state that long term investing for the individual is a sham and cite an inability to overcome EMH.

This is confusing because you state that Goldman's black boxes, hedge funds, insider info, etc. can overcome the EMH - it appears that you made this argument to support the idea that while powerhouses can profit in the long run, individuals who don't have the info, can't. But these activities you mention are short term in nature. Stevie Cohen is making quick short term moves once he gets word from his friendly insiders what's up. Black boxes can do a variety of things, but the most powerful and active are short term - you know, those spoofs on the ECNs that headfake you, or the market making algorithms, and all the crap going on with boxes in the ES(S&P futures). Look to Jim Simmons and RenTech, I know they love automated short term strategies on futures markets.

I must ask though, what exactly is the time frame you are referring to for an individual that is actively buying and selling stocks in an investment portfolio? The SEC states that pattern daytrading is 4 or more roundtrips in one consecutive 5 day period, or something like that. I don't daytrade stocks, but I believe it's close to that. Are you saying that an individual who has a multi-week or multi-month strategy is just fooling himself?

Once you explain this, I will be able to better understand where you are coming from and give a more thorough response.

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My statements are not bold. First, I think its important to refute the claim that EMH is dead. It is alive and well. Fama and French are 2 of the most famous names in finance.

Here is a great article from the WSJ (free this week) As Two Economists Debate Markets, The Tide Shifts

Of interest is Richard Thaler's quote at the bottom (a behaviorist who refutes EMH) "Defending efficient markets has gotten harder, but it's probably too soon for Mr. Thaler to declare victory. He concedes that most of his retirement assets are held in index funds, the very industry that Mr. Fama's research helped to launch. And despite his research on market inefficiencies, he also concedes that "it is not easy to beat the market, and most people don't.""

Also - I don't think the markets are perfectly efficient - there are anomalies and the exploitation of these anamolies makes the market more effecient. EMH is theory, not a law. It helps us understand how markets work and also the most prudent approach. I think it was French that said "The markets may not be effecient but its best to act like they are".

Considering taxes, trading costs and behavioral deficiencies in an investors character (i.e. selling at bottom, buying at top, chasing hot sectors) and most aren't gonna win. Hey - I find Cramer as entertaining as the next guy and I think actively managing a small part of one's portfolio can be entertaining and may even be profitable but it will have nothing to do with superior stock picking skills.

My argument is that beating the benchmark is possible but not probable (and the longer the term the harder it becomes).

[DesertCat]

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Beating what market? What index???



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Vanguards Small Cap Index fund has returned an average of 7.5% a year the last 5 years. It's small cap value fund has returned 12.66%. These are pre-tax returns.

Since I started investing full time 5 years ago, my "after tax" returns have beaten indexes pre tax returns by 30% per year.

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The truth of the matter is that someone is always going to be beating their benchmark. A good example of this is top performing mutual fund listings. The top performing mutual funds in their respective categories is never an index fund but its virtually never the same fund year after year.

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This isn't one lucky year. I beat the indexes every year. My worst year is north of 30%.

Is it because I'm a genius? Far from it. Is it because I know something others don't? No, I just use Graham's and Buffett's techniques. One advantage is that unlike most individual investors I am able to work at it full time.

But most importantly, I have a small portfolio. It's so small that when I started, I need 20% returns just to feed my family. So you might say I have all the correct incentives, and all of the best options.