Of course I’m still here… spending (wasting?) my time on forums and blogs ;)

Even if performance of funds isn’t guaranteed, the minimal fees are so i’d stay away from investments that cost more yearly than 0,35% for domestic / 0,50% for international / 0,65% for specialty sectors. Even when an ETF has low MER, it can become quite expensive when you factor in the trading costs of adding small chunks of money to it over many years.

I think it is also important that my portfolio delivers average returns until it is large enough so I don’t have to care about temporary swings in its value. Like if I had only $1000 to invest, i would use index funds with the lowest management fees, but once my portfolio is large enough that i can lose (on paper only) $2000 in a single day without losing sleep over it, then picking funds and stocks makes sense.

I think problem with index funds is twofold:

With the growth of index investing, when a stock is included or excluded from an index, its value will change without regard to the fundamentals. As an exemple, if a company that was slightly too small to get included in an index grows enough, then all index funds will fight over the few available shares once it is part of the index. Which would drive the price up without any improvement in the fundamentals. On the other hand, if the situation of a company that is part of a small cap index or emerging market index improves too much, it can get kicked out of the index, so all the index funds will shortly sell all their shares, even at price below net asset value in order to track the index. This buy high and sell low effect brings the second point.

Index tracking is more related to herd mentality than to value investing, as popular stocks represent a larger protion in a market cap weighted index than value stocks. Therefore one might wish to purchase the index fund plus a few individual stocks with a much lower p/e ratio than their sector. Or on the other hand, purchase the index and short the stocks that have a p/e ratio too high for their sector, so they can profit when these stocks will revert to the mean. Another exemple, some dividend aristocrats have the lowest earnings per share rate of their whole industry… are they compromising their growth just to increase dividends and stay part of the prestigious index? Thus not acting for the best interest of their shareholders.

To summarize, index funds are the meat and potatoes of a meal, while it is hard to do without, you do not want to only rely on it for longs periods of time… unless you choose the “lazy portfolio” route and spend your time increasing your wages to be able to invest more instead of getting that 1% more return.

I personally have been following Natural Gas ETFs at http://naturalgasetfguide.com/

I guess my point is that not being invested in an index ETF/fund does not equate to “trying to beat the market.” I pick stocks, but I don’t imagine I will “beat the market”. I just don’t want to own every stock in every index, that’s all. I wouldn’t invest in a broad-based US index because I don’t want to own Coca-cola, etc.

I recommend reading John C. Bogle’s Common Sense on Mutual Funds, which gives you plenty of numbers as to why actively managed mutual funds are awful.

He suggested that because most investors in actively managed funds are older, the funds themselves are meant to add a little bit of safety and that’s why they don’t beat the market. I think he was meaning they own bonds and the like.

This seems like sales bs. That said, I’d like something to back me up. Any idea of links to these studies that show actively managed funds do so badly?

If you must know, a couple of the reasons I don’t put all my holdings in Berkshire Hathaway are that I don’t want all my eggs in one basket, and I don’t know what will happen to the company or the stock price when Mr Buffet dies.

I missed something in my last post. Of the 8 investors in Buffett’s letter, 3 are still active – Tweedy Browne and of course Warren Buffett (the main person in the Buffett Partnership) and Charles Munger (Warren Buffett’s current partner).

In other words, all 3 that are still active continued to massacre the indexes ever since.

Ed

As you might expect, nearly all of those super-investors are now comfortably retired. They exception is Tweedy Browne, who have built a lasting investment firm. In the last 15 years, they have continued to beat the index by 4%/year compounded after fees – 11% vs. 7% for the MSCI EAFE (http://www.tweedy.com/content.asp?pageref=global ). Unfortunately, they don’t manage a fund in Canada.

Choosing a replacement should not be that hard. After Wayne Gretzky retired, I would have picked Jaromir Jagr on offense and Nicklaus Lidstrom on defense.

I think people have trouble picking good fund managers because they look too short term (less than 15 years) and they look for a hot fund manager instead trying to figure out how to identify the best. If you look for a hot hockey player that just had a scoring streak and a hatrick, you probably will not end up with Sidney Crosby.

Warren Buffett’s comments are that indexes are better than an average mutual fund, but he would clearly still think that his style is better. He has not dumped his shares to buy an index. And I’m sure he still believes the same about the current super-investors of Graham-and-Doddsville.

Ed

If you think that way, then why do you invest yourself? If you admit that Warren Buffett is a better investor than you, why would you not just buy Berkshire Hathaway stock with your entire portfolio? Do you actually think your DIY portfolio will out-perform Warren Buffett? Think about it.

The advantage of investing is that you can hire the world’s best to invest for you.

I have come to the conclusion that I will probably not ever make it as an NHL ass-star. Part of this is because I can’t skate, have not played hockey for 15 years, and am over 40. However, I believe I can still identify NHL ass-stars. For example, I think that Sidney Crosby, Dany Heatley and Evgeny Malkin are all super-stars and likely will continue to be for a few years.

I don’t know how well you play hockey, Patrick, but do you think you could out-play any of my 3 picks?

Similarly, I believe I can identify al-star fund managers, all of which would probably beat any portfolio of stock I would pick myself (if I still picked my own stocks).

Over-confidence is one of the quite humurous insights into humans that come from Behavioural Finance, which is probably why so many people choose to be DIYers (plus it can be fund with small amounts of money) – even when they readily admit that they cannot beat Warren Buffett. For example, many polls show that 90% of all drivers believe they are above average.

Ed

One of the questions an investor might ask is how to manage the transition from one star performer to the next, or is it built into the ‘progeny’ each creates? If you have a number of star managers which allows you to diversify, then you can move your funds as a manager retires, however if you have a single manager, how do you ensure continuity? I recognize that if one was to earn stellar returns for a decade or so, it would not be a problem to park money somewhere (money market) for a period while finding new managers, as it would take years for the market as a whole to catch up.

The Indexer does not have to worry about changing horses.

DAvid

I’m with you on “You miss out on the chance of investing your money with the next Warren Buffet.” Have you read the article by Warren Buffett “The Super-investors of Graham-and-Doddsville”? Here is a link: http://www0.gsb.columbia.edu/null/CIER?exclusive=filemgr.download&file_id=645551&showthumb=0 .

Warren bumped into these 8 guys and new ahead of time that they would likely beat the indexes, and all of them did by huge margins over decades.

Wouldn’t you much rather have any of these guys manage your money, rather than just having it in some index?

Ed

There’s a lot of backlash about market timing. I’ve read (& loved) Malkiel, I can understand where it’s coming from, but I want to be clear about one very important thing:

Unless you plan on dying with your investments in the bank, you will be required to “time the markets” at least once.

The common usage of “marketing timing” is really a shorthand for “trying to optimize mins and maxes”. But at some point in your life, you will likely want to trade in your investments for something else.

So do be judicious and do understand your time limitations. It’s nice to plan that you’ll be holding the “stock index” for 30 years. But you really have to be open to the possibility that it could be 27 years or 35 years.

Too much indexing may increase volatility, I suppose, as a smaller and smaller fraction of the traders actually dictate the prices that the rest of us follow.