Carpe Diem

Top ten trends to watch in finance for 2013: No. 1 is the ‘revenge of John Bogle’ and the ‘ETFication’ of investing

Barry Rithholz in today’s Washington Post Business Section:

From my perspective, these are the more significant trends that will probably continue into 2013:

1. ETFs are eating everything.

The revenge of John Bogle continues apace. As investors figure out that they are not good at stock-picking or managing trades, they have also learned that most professionals are not much better. Paying high mutual fund expenses to a manager who underperforms a benchmark makes little sense. This realization has led to the rise of inexpensive exchange-traded funds and indices.

This “ETFication” has obvious advantages: low costs, transparency, one-click decision-making. ETFs are accessible through the stock market for easier execution, with no minimum investment required.

MP: I confess that I’m an “unofficial” Boglehead.

Update: As an example of the low expenses/fees for ETFs, the Vanguard S&P 500 ETF has an annual expense ratio of only 0.05%, which in dollars would be only $50 per $100,000 invested, or $500 per $1 million. In contrast, the average expense ratio for an actively managed large-cap stock fund is 1.12%, which would mean $1,120 in fund expenses per $100,000 invested, and $11,200 per $1 million invested.  And in most cases, the actively managed funds earn lower returns than an indexed fund, so you’re paying thousands of dollars in fees for the active funds to earn you a lower return than an index fund!  For example, the legendary Fidelity Magellan Fund has under-perfomed the S&P500 Index over the last 26 years since 1986, and it’s not even close – the Magellan Fund has been almost flat for a quarter-century, and is up by only about 43% over that entire period, while the S&P500 Index is up by more than 500%!

70 thoughts on “Top ten trends to watch in finance for 2013: No. 1 is the ‘revenge of John Bogle’ and the ‘ETFication’ of investing

  1. Yes, ideally, investing a little each month in ETFs, starting in your teens, for over 30 years, is one of the best ways to build wealth.

    However, it’s important to note the difference between a structural bull and bear market, and also the difference between a cyclical bull and bear market to make appropriate adjustments.

  2. However, it’s important to note the difference between a structural bull and bear market, and also the difference between a cyclical bull and bear market to make appropriate adjustments.

    That’s the BS people feed themselves to make it seem like they know more than they do. Worse, it’s the advisers feed their clients to encourage clients to allow them to churn their portfolio. Any adviser worth anything at all should create a portfolio that takes into account all possible markets and it should only be adjusted as your individual life circumstances dictate.

  3. I’ve been an official Boglehead for years, and I spend a lot of time on that blog and Wiki. I took my great gains from Peter Lynch’s Magellan fund when he left to Vanguard and I’ve never looked back. I bought a dinky house in 1977 when I could have bought bigger and expensive house, and I invested in Magellan instead by making equal payments to my mortgage holder and Magellan every month for 10 years. My investment strategy since 1987 has been 80% asset allocation long-term in Vanguard and ETFs and 20% active trading short-term at Fidelity because I like to trade for a hobby.

  4. i love all this ETFification.

    it concentrates all the assets in a few names/indexes and makes picking stocks outside of them even easier and the valuation mismatches even greater.

    the micro cap space is priced more inefficiently than i have ever seen it. inefficiency = opportunity.

    i freely grant that 99% of individuals should NOT play in that space. it’s too hard and there is too much fraud. but if you can play there, nothing provides better returns.

    when all the individual money pushes into that space, it’s like a firehouse at a teacup. there winds up being nothing decent left to buy.

    just keep in mind that ALL investment strategies wind up self defeating as they get popular.

    once everyone agrees on somehting, they are immediately wrong.

    all these “styles” are a pendulum. the longer indexing is popular, the easier stock picking gets until at some point the system flips and stock pickers outperform.

    the market has incredibly high correlation right now as it fixates on the endless stream of government and central bank binaries. this makes stock picking very hard. at some point, this will change.

    if you bought the S+P at the end of 1999, you are flat. after inflation and fees, you are down a ton.

    averaging in would have helped some, but the etf’s are not performing well lately either.

    typical equity CARR is 8%. we founded our flagship fund in 2004.

    since then that number is below 3% for the S+P.

    tack on 50bp of fees and deflate at cpi and you have basically stood still in real terms with the S+P.

    be careful when you look at this “ETF’s rule” marketing stuff.

    they have not done terribly well either over the last decade.

    • when all the individual money pushes into that space, it’s like a firehouse at a teacup. there winds up being nothing decent left to buy.

      That’s the nature of markets. Excess returns attract competitors and competitors compete away all the excess return until everyone is earning a normal profit and weaker players get pushed out completely.

      the market has incredibly high correlation right now as it fixates on the endless stream of government and central bank binaries. this makes stock picking very hard.

      When has it ever been easy? There is an abundance of strategies around that correlation of assets these days. Which, of course, makes them even more correlated. Say, do you remember when we used to think about the impact of economic events instead of government manipulation to make decisions? Ah…the good old days.

      averaging in would have helped some, but the etf’s are not performing well lately either.

      “averaging in”? Oh no. Et tu, Morganovich, et tu?

      The thing about ETFs is you’ll do best with the most liquid ones that also charge the lowest management fee. It’s a balance. You don’t want very low management fees only to give it all up in the bid/ask spread and suffer the risk of significant deviations from NAV. As a general rule, the largest, most liquid ones will be the best bet.

      • “As a general rule, the largest, most liquid ones will be the best bet.”

        And you can trade many of those ETFs for free at Fidelity (this is not an advertisement :) )

        • Well, if you like Fidelity, feel free to advertise. They have been in competition with Vanguard and, as a result, both firms have very low management fees and transactions costs. I have always kept passive investments at Vanguard, but I’d recommend either because they both have great service and very low fees. Ah….the power of competition.

      • methinks-

        “When has it ever been easy?” the late 90′s were incredibly easy. if you could not pick tech stocks from 1995-99, you likely needed a new profession.

        even 2003-7 was easy and 2008 was easy to see coming if you were paying attention.

        but this tape is different and i think many are finding it much more difficult. traditional indicators like rate spreads are worthless. government and CB intervention in markets is rampant and unprecedented in scale. you have to watch DC and brussels more than even the gdp or jobs figures. every month there are 2-3 huge up days and that’s the whole game. miss them and you miss the whole gain.

        i miss just being able to look at the economy and the individual stocks and make a call. having to follow big government and outrageously activist CB’s adds some nasty complexity to the system.

        and no, i do not average in. fear not.

        my investment philosophy is almost precisely the opposite of the bogelheads.

        i take very concentrated positions in single companies when they are deeply out of favor and traffic almost entirely in microcaps. “average in” is not even somehting we think about. we try to be very tactical and very aggressive. it’s a rifle shot, not a machine gun.

        that said, we do this all day. like you, it’s our jobs. if i spent an hour a week figuring out my investments, i would need to use a VERY different strategy and therefore think that most people ought to.

        etf’s and averaging in may be the best plan if you are not an expert and just want to out some money away every month. it’s gotta be better than dealing with the kind of hack brokers that would service an account of less that $1,000,000 or playing newsletter roulette with motley fool or any of the pay to read guys. if you have 1-2 hours a week to figure out your investments, concentrated positions in micro caps would literally be financial suicide.

        the one counter argument to your “size is good” philosophy seems to be that size also kills. if you are just mimicking an index, it’s a little better, but following huge assets into an index means the index is unlikely to be cheap.

        it’s much worse for active managers though, especially in mutual funds. size kills. wall st is an asset allocation system that keeps giving anyone who can outperform more and more money until they cannot outperform anymore. thus, when looking at active managers, it’s better to go smaller if you have faith in the guy and then get out when he becomes a “name” and is glutted with assets.

        • We trade a wide range of securities from derivatives to equities around the world, but our concentration has always been in medium to low liquidity securities. We make so much money because we provide a scarce resource (liquidity) in that part of the market. The biggest problem is risk management and that’s where our proprietary innovations have allowed us to reduce the risk in capturing that edge.

          What we do can most appropriately be described as statistical arbitrage, so stock picking is anathema to me. It’s a completely different mindset that I left behind when I stopped being an equity analyst. It was never clear to me if any successful picks resulted from luck or from skill. But, that is not a judgement of your strategy, just a difference in our approaches. I don’t invest in anything but a statistical relationship between assets and you are an investor in companies.

          That said, we both look for edge in our trades. Note what you said: “if you are just mimicking an index, it’s a little better, but following huge assets into an index means the index is unlikely to be cheap.”

          Of course. Nor is it likely to be dear. It is most likely right around its NAV, which is an underlying basket of assets (sometimes securities, sometimes real estate, sometimes royalty trusts or whatever).

          As professionals who trade our respective firms’ capital, we are always looking for edge in our trades. That’s what we’re paid to do and we charge far more than a managed mutual fund manager and our investors pay because we deliver huge risk-adjusted returns.

          However, most people aren’t going to build a model and watch ETFs all day waiting to capture edge and then hedging with the underlying basket. Most people wouldn’t even know how to begin to to do that. So, most people are looking for the return of the particular sector they’re interested in. They aren’t seeking theoretical edge in trading ETFs.

          Although, such edge is possible when the SEC does fun things like prohibit shorting of financial companies and the XLF goes all wonky. Still, part of what appears to be edge is just a deviation from NAV to compensate traders for the inability to cheaply hedge their theo.

          For those people (which is most people) who simply want exposure to a particular sector, the most important thing is not buying the ETF cheaply, its the low fees combined with liquidity so that they can minimize the costs of getting the exposure they want.

          And, oh Lord, do I miss not having to be laser focused on politics. As for size and under-performance in hedge funds, I too have been baffled by people’s love of giant funds. As a trading company, we charge no management fee and a big performance fee. Our incentive is to raise the least amount of capital possible and maximize leverage (while minimizing risk). Hedge funds (not necessarily yours, mind) seem to be in the game of asset collection so they can collect management fees and assorted other fees. If they make a positive return, hey….so much the better, but it’s not that important. I’m finding that true especially among commodity funds. So, I understand why hedge funds want a bajillion dollars in AUM, but why would investors? A lot of institutional investors have gotten wise to the whole thing and are demanding comp structures like ours, non-institutional investors will likely cotton on soon. In commodities funds the only reason I can think of is that there aren’t as many options to get exposure to commodities.

    • if you bought the S+P at the end of 1999, you are flat. after inflation and fees, you are down a ton.

      Are you including dividends which have run around 2% per year? But, even if you’re correct, we can choose another time period where that’s not true. If you’re looking for market risk and market return, then this outcome is one you’ll have to factor into your decision.

      The alternative to an ETF is a managed fund, S&P 500 tracking fund, or creating your own basket of stocks that you then have to rebalance against the S&P basket constantly. Both methods (assuming most people even have the ability to do option 3) are more costly than buying a liquid ETF.

      • methinks-

        i am excluding dividends because 1. they are taxed so aggressively and 2. because you would get them if you just bought stocks/managed funds as well and trying to get valid comparisons is tricky.

        bottom line though is that that dividend rate is likely less that inflation + fees and you are still, at best, about flat.

        of course we can pick a better time period, i was just figuring out how far back you could go and not have made money.

        from 2003 you would be doing about 2.5% a year CARR to now. obviously, if you bought in early 2009, you’ve done great, but we are now slipping into the trap of assuming individuals can time the market.

        this is why i was talking about averaging in. if you just bought the SPY every month for the last 15 years, you’re likely up, but not but a whole lot. your average cost would be around 1250. that puts you up maybe 18% at current prices. which is not much return for 15 years. taking it back to 20 years might take you avg cost down to 1000 and have you up 47% in 20 years, but that’s only about a 2% carr. the fact is that the S+P has been rangebound since 1997. unless you timing or stockpicking was excellent, an investor has not made even a small portion of the typical 8% equity returns on it since then.

        you have also had periods (like 2002-3 and 2008-9) when your overall return was significantly negative.

        • I’m not sure you’d have done better averaging in during this period. But, I concede, if you just pick the exact right period before it happens, then averaging in can do better. It’s the picking just the right period when it’ll work that’s the problem, right? The overwhelming majority of the time averaging in will produce lower returns, so it’s a negative expectancy strategy.

          The reason for that should be obvious. The entire amount of the capital you will invest is not exposed to to market risk, so why would you expect a market return or, even more silly, a greater than market return? Sure, you can luck out, but let’s not mistake luck for skill or wisdom.

          DCA, along with portfolio insurance and dynamic hedging (although the latter seems to almost be dead) is a persistent meme that has been thoroughly dismantled by both academic research and practice and flies in the face of reason, but the siren song of mythical outperformance continues to live on in the hearts of financial advisers and star-struck individual investors.

          That said, nobody has the option to invest all the funds they will have to invest in the beginning of their lives. Thus, we are all stuck investing periodically over our lifetimes and the biggest lesson we can draw, for all practical purposes, is that we should invest as much as we can the moment the funds to invest become available or we’re giving up return. Let’s just not also engage in the fiction that periodizing investment somehow enhances our return.

          • It’s pretty easy to do the conceptualize. Imagine investing $1200 over a twelve month period vs. investing it all on the first day of the year. In the first month, the lump sum investment earns the monthly return on $1200 while the periodized investment earns the return on only $100. The next month, the LS investment earns a return on $1200 plus the 1st month’s return on $1200 and the periodized investment earns on the incremental $100, plus the original $100 and the return from the first $100. Etc.

          • methinks-

            of course, you are assuming that you have all the money at the beginning of the year.

            given that i really get paid only once a year, this is not an issue for me, but the majority of folks who do not have jobs where bonus is the big driver of compensation, they just tend to take some money out of every paycheck and drop it into whatever their savings scheme is.

            it’s not a bad strategy if that is how you get paid, but sure, if long term returns are positive, then you want as long a time-frame as you can get.

            from 1999-now you would have done better averaging than if you put it in all in 1999. this is because the market has sent a lot of time lower than 1999 and almost none higher..

            alternately, if you put all your money in at the end of 2002, you would have done a lot better than averaging.

            of course, these thing are obvious after the fact.

            the question is one of risk appetite and how you feel about the market right now.

            is today a great time to go all in on the S+P, or will there be better deals later this year or next?

            i’m not sure anyone can really give you an answer to that that you can take to the bank.

            that’s why averaging and diversification are likely a good idea for folks who do not invest for a living.

            if you put the time in, you can get far better results by being more selective and doing a lot of due diligence, but that really requires following stocks as a career, not a hobby.

          • of course, you are assuming that you have all the money at the beginning of the year.

            That’s right. But, I chose a year as the period in the example to make it simple. In fact, you can choose any period and the most relevant period is a person’s investing lifetime. Nobody gets all the money at the beginning of their lives, but that’s not the point.

            The point is that periodizing investment does not produce superior returns. If you get superior returns, it’s not because you’ve periodized investments, it’s for another reason which is most probably luck.

            it’s not a bad strategy if that is how you get paid, but sure, if long term returns are positive, then you want as long a time-frame as you can get

            And they are positive. Again, the point is that averaging in does not produce superior results. If you get superior results over your investing lifetime, it’s not from periodizing – even if you can cherry pick a few periods in which you might have theoretically done better if you happened to choose exactly the right dates to put your money in!

            the question is one of risk appetite and how you feel about the market right now.

            is today a great time to go all in on the S+P, or will there be better deals later this year or next?

            That’s not a question of risk appetite. That’s a question of market timing and I think that’s a fool’s errand.

            i’m not sure anyone can really give you an answer to that that you can take to the bank.

            Nope. And that’s why I run my firm so i don’t have to care. We hedge our theo and seek to have no exposure to market risk. That’s not an option for anyone not doing this for a living.

            that’s why averaging and diversification are likely a good idea for folks who do not invest for a living

            “Averaging” a.k.a periodical investment is the ONLY option people have available to them. But let’s not engage in the fantasy that periodization of investments is in any way providing additional benefits. Diversification is another story. The market won’t pay you for taking diversifiable risk.

            if you put the time in, you can get far better results by being more selective and doing a lot of due diligence, but that really requires following stocks as a career, not a hobby.

            It sounds to me like what you do (buying deeply out of favour stocks) is not that different from what we do, in principle. You’re essentially saying that there’s edge in the trade because the stock is trading far below fair and thus you have theoretical edge in the trade. Out of curiosity, do you guys ever try to hedge that edge with options or by selling correlated stocks? Options on microcaps CAN be so illiquid that you give up a lot of the edge in hedging, but it would reduce your beta risk (which I assume you’re trying to avoid if you can).

          • investing over time (again, of which i am not a fan) does provide a benefit in terms of making you less susceptible to bad timing.

            It really doesn’t. Nobody is blessed with the clairvoyance to time investments – whether it’s a single lump sum or periodic investments over our lifetime – and our memory plays tricks on us. We tend to remember when we accidentally got it right more than when the market went against us. If you were truly shielded from the risk of bad timing by investing periodically, you would outperform the market and that doesn’t happen.

            What you can say is that periodic investment reduces your risk because all the capital you will invest over a lifetime is not exposed to market risk for your entire lifetime. Of course, the price of that lower risk is that you’ll underperform the market over that period. There’s no free lunch.

        • morganovich: “unless you timing or stockpicking was excellent, an investor has not made even a small portion of the typical 8% equity returns on it since then.”

          You needed the 30%-50% years of something like MSCI to boost the returns in the period you described (15-25% asset allocation). I hope no one is trying to use a 100% SP 500 portfolio or use market timing as a long-term strategy.

          • even so, things like emerging markets have been dead for years and anyhting that tends to rally like that can fall hard too.

            i have seen emerging markets bust, and they bust hard.

            just keep in mind that it is CARR that you care about, not “most years”.

            since 2008, carr on the msci EEM has been about 8%, far better than the S+P, but not enough to pull you to double digits and pretty much flat since 2010.

          • i have seen emerging markets bust, and they bust hard.

            Yah. 1998 and May of 2006 were hard busts (outside of 2008). Also, while emerging markets are generally poorly correlated with developed markets, providing diversification, during shocks all correlations approach 1. You suddenly have virtually no diversification when you most need it.

          • morganovich, I’m not sure how to calculate CARR from the data I have. I have yearly percentage gains for each fund or cash balance using the balance on the first day of the year subtracted from the balance at the of the year divided by the balance on the first day of the year. Any ideas for an Excel column formula to get those data to CARR?

          • methinks-

            “That’s not a question of risk appetite. That’s a question of market timing and I think that’s a fool’s errand”

            1. i agree about the fools errand part.

            2. i still think it’s sort of both. if timing is a fools errand, then investing over a longer period is safer and lower risk as you are less likely to be going all in around a top. i’m not sure you can separate market timing and risk as neatly as you are.

            investing over time (again, of which i am not a fan) does provide a benefit in terms of making you less susceptible to bad timing.

            it plays the same role in terms of market timing as sector or asset class diversification plays in risk diversification.

          • ugh. posted this in the wrong spot initially.

            investing over time (again, of which i am not a fan) does provide a benefit in terms of making you less susceptible to bad timing.

            It really doesn’t. Nobody is blessed with the clairvoyance to time investments – whether it’s a single lump sum or periodic investments over our lifetime – and our memory plays tricks on us. We tend to remember when we accidentally got it right more than when the market went against us. If you were truly shielded from the risk of bad timing by investing periodically, you would outperform the market and that doesn’t happen.

            What you can say is that periodic investment reduces your risk because all the capital you will invest over a lifetime is not exposed to market risk for your entire lifetime. Of course, the price of that lower risk is that you’ll underperform the market over that period. There’s no free lunch.

          • For us non-professional money managers, the choices are whether to spend now or later and attempt to make the best possible choices on the money later part with cash flows in on a weekly basis. The encouragement to save instead of spend is often strengthened by the confirmation bias of DCA, and if it gets people to live within their means, that’s not all bad. Of course, the professionals are not snowed by the DCA marketing hype of fund managers.

          • Let’s put it another slightly more technical but also more succinct way:

            If we all understand that we can’t time the market then timing the market has zero expectancy (half the time it’ll go in your favour, half the time it’ll go against you).

            So why are you investing? Because over the long run, the market goes up – the expectancy is positive.

            Thus, by trying to time the market you are engaging in a zero expectancy activity and deferring your positive expectancy activity. Invest as soon as you get the funds to invest and don’t put it off because in doing so you’re just reducing the return you can expect to earn over your investment horizon.

            To Morgan’s claim that periodic investment is protective against bad timing: if the expectancy of timing the market in any one period is zero, why would the expectancy of multiple independent periods be greater than zero?

    • “be careful when you look at this “ETF’s rule” marketing stuff.”

      ETFs can have other marketing gimmicks, such as their names, which make them easy to remember. For instance:

      TAN, WOOD, CUT, OIL, etc.

      What is theShares FTSE EPRA/NAREIT North America Index? A real estate index. Maybe SOLD might have been better for marketing purposes.

  5. For decades, high-fee, high-load active portfolio management has demonstrated little to no value-added. Research departments are nothing more than the creation of marketers; they are used to help the peddlers differentiate their marketing efforts. The results are simply not there. So it shouldn’t be surprising that low-fee proponents like Vogel who promote indexing and all its variations are now sitting in the catbird seat. This his not revenge, its value-added for the investor.

    Just look at the performance of the standard S&P 500 benchmark used by many “active” managers. Then compare those abysmal results over the past “lost decade” to the solid returns generated by small and mid-cap index funds available via ETFs.

    The day of the “value-added,stock-picker” is not only over–it never happened. The exceptions are very far and very few between compared to the plethora of passive choices in an indexed universe. And picking the right spots in that universe over the past decade has been easier than shooting fish in a barrel.

    • nonsense.

      i know lots of guys who routinely crush the market and have money with several including greenlight, AWH, and others.

      we have outperformed the S+P by more than 12% a year since 2004.

      it not only has happened, it is still happening.

      it just is not happening in the mutual fund space.

      guys that are good marketers pick the mutual fund model. raise assets, get paid a fee even when you lose.

      the guys that are good at making money use the hedge fund model and get paid on profits.

      • 12% and you are blowing your horn? 12%? That’s it?

        I am up about 2.5x the S&P 500 for the past several years. And I use indexed ETFs as my launch platform combined with leverage.

        If I beat the S&P by only 12% I’s pack it in. 12% is not how you spell CRUSH.

        • i think you misunderstood.

          that’s per year, after fees mac.

          so you pay me 1% of assets, 20% of profits, and you still beat the S+P by 12% PER YEAR. that compounds.

          that means that since fund inception, our investors have made 234% vs 26% for the s+p meaning we beat it by about 208 percentage points, or, put another way, had a return 9 times that of the S+P.

          this is audited data.

          you can look us up on hedgefund.net

          manchester explorer fund.

          we are getting more than 3X your return. (3.6 to be precise)

          perhaps you ought to make more of an effort to understand what is being said before you start mouthing off.

          9 X the market and 3.6 times a “mac daddy” is how you spell crush last i checked.

          • Wow on your returns morganovich! I guess I think too small. My peers are those who spend 100%-120% of their yearly income.

          • Sorry, but you still are in the slow lane. The very slow lane. RYVYX (based on the NDX index) TROUNCED the S&P 500 by 2.34X since 2004. And after 30-days of ownership, you can margin RYVYX which enhanced my performance. There are many other index-based thorough-breds (from Pro-Funds, to Rydex/Gug. to plain old mid/small cap indexed ETFs) that allowed comparable enhanced performance.

            No super-secret hedge fund formula–just simple, easy, ass-kick, blow-out performance. Throw in a good sense of the market, the ability to pick what’s working and where the action resides and voila–no contest.

            Sorry, but you sound very overpriced to me. You need to learn to say what you mean to say before you say it. The whale the spots the most always gets the harpoon. Managers like you create performance on paper, not for clients.

          • Manchester Explorer Fund is not available via Google.

            Post your audited results and post the web location where they can be reviewed. Post your prospectus. I don’t know for what you are trolling. I have a strong feeling that your typing skills moves your fingers a lot faster than any money that you ever touched.

            Why all the secret stealth? If you are what you claim to be…then PROVE IT.

          • The RYVYX is an ultra-long fund. It is designed to return 2x the underlying index and it, along with the entire genre, are volatile as hell. And they rarely deliver what’s promised. There’s no magic to them. In fact, they’re extremely poorly constructed derivatives. You’re always paying for gamma and you get tons of it when you don’t need it, but when the shit hits the fan and you need to be long gamma, those ultras are short gamma. Not only are you always paying for gamma you never get, but you’re paying to be short at the when you want to be long. It’s insane.

            The whole market knows what those funds need to do to balance and everyone front-runs them, making it almost impossible to produce the promised returns.

            So, you took that risk and then piled on more risk by levering those things and you want credit for that? For that kind of risk your returns better be out-effing-rageous just to justify the risk you take.

            No. Sorry. Even if Morganovich isn’t hedging his beta risk, he’s not taking on anything that approaches the risk you’re taking. He still wins.

        • Gentlemen, this is all just testosterone-fueled growling at each other until you all discuss your risk adjusted returns. The unadjusted returns mean very little. If you take massive risk, you’d better get massive returns.

          Morgan’s returns are pretty damn good and a lot better than what his investors could have gotten with most of his available competitors and certainly better than they could have done themselves or they wouldn’t have money with him.

          • mac daddy-

            if we are in the slow lane, then the ryvyx has overshot the off ramp and is lost in the woods.

            we get 3.6 times your returns AFTER fees.

            all the numbers i gave you were net.

            as i said, since 2004 we have beaten the S+P by 9X.

            how it it you are trying to trot out 2.34X as greater than 9X?

            we’re 3.8X the return of the index you claim to like.

            you seem to still not be understanding this.

            you do realize that 9 is a bigger number than 2.34, right?

            if only getting 26% of the return you could after fees sounds expensive to you, well, i’m really not sure what to tell you apart from maybe take a math class.

            there is no super secret hedge fund formula, at least not one that i know.

            we are a simple bottoms up heavy due diligence oriented fund. we take concentrated positions in microcap companies and often help them grow.

            there is nothing tricky or secret about it.

            it’s just years of experience and old fashioned shoe leather.

            but it is also a full time job. to try and do what we do in a couple hours a week would be madness. it takes a lot of experience and a lot of work, but there is no big secret.

            it’s the oldest, most vanilla investment model around.

          • mehtinks-

            risk adjusted is always a key issue. (though let’s face it, the wall st models for this have not exactly covered themselves in glory lately, have they? there seem to be a lot more black swans on this pond than we thought.)

            re: manchester, i think they look even better risk adjusted. we are never 100% net long and rarely over 100% of gross exposure. that is how you keep from getting carried out. a lot of guys that were 100% long and 100% short in 2008 learned some serious lessons about how different that can be from being flat. i saw some “market neutral” guys have down 25% years.

            we have very beta and an r2 of under .25 to any major market.

            we are also very tax efficient which is an issue i am consistently amazed that so few investors (even professionals and institutions) look at as much as they ought to.

            i think you make an excellent point about risk adjusted returns, but using a long time period often winds up doing the same thing as looking at risk exposures etc.

            the guys that run at leverage get demolished in years like 2008.

            that’s where you separate managers from guys who use leverage during a bull.

            we have had some great years, but the one of which i am most proud is 2008 where we were down 0.5%.

            that was the year that finally put us on the map and got us some capital inflows, especially as, unlike many who did well in 2008, we had a great 2009.

            our month to month volatility can be a bit much for some investors, but that’s the nature of micro caps and concentrated holdings.

          • Morgan,

            It is the nature of small caps to be more volatile. I was talking about risk adjusted returns based on Sharpe, Sortino, or Treynor ratios (whichever is most appropriate for the firm being measured).

            re long/short: I remember a big trade hedge funds put on in July 2008 where they were long oil and short financials. They thought they were hedged and they all got clobbered because, of course, oil and financials aren’t correlated. It was just a long position and a short position. I’m constantly amazed by the stupidity managers are capable of.

            It’s pretty clear that what you’re doing does not approach the sheer idiocy of multiplying through leverage the effects of high management fees and negative gamma. I think we agree that ultras are just a bad investment idea, but a great marketing scam.

  6. I am an outlier, rebel and contraian in regards to Vanguard etfs.

    Ironically, my only mutual funds are Vanguard products and my ten different etfs are non Vanguard. The Vanguard mutual funds that I own, VWELX and VWITX, have been excellent for me.

    I thank John Bogle for his influence in expanding the constellation of etfs and for also having some great, low cost mutual funds.

  7. Methinks: “Let’s just not also engage in the fiction that periodizing investment somehow enhances our return.”

    What dollar cost averaging (and asset allocation) does is keeps average investors like me from selling in down markets and buying in top markets over time: selling low and buying high is the intuitive model that sinks many people’s wealth. Methinks and Morganovich’s professional trading strategies and the time they spend on them are not for everybody (and probably stress 1 to 3 year periods (maybe 5) instead of 10, 20, and 30-year periods). There’s no successful alternative long-term strategy other than spending less than you earn over time and letting compounding positive returns take over. The probabilities of winning the lottery are too low and too many use that type of wishful thinking instead of building wealth. There are very few years I don’t have double-digit portfolio returns using Bogle’s asset allocation strategy.

    • walt-

      i mostly agree with you.

      one quibble:

      having a 2-3 year time horizon is not as different from having a 30 year time horizon as you may think. that 2-3 years is a rolling 2-3 years. if you have investments that are made over time, some are maturing, some are being made as new etc.

      30 years just winds up being a rolling progression of 3 year investments.

      you also need to be careful about saying “there are very few years under 10%)

      since 2009, this has likely been true.

      but what about 2008?

      it does not take many down 40% years to wreck returns. in fact, one will do it. it takes over 5 years at 10% return to make up for 1 40% drop.

      be very careful about “most years” as a metric. it can be very misleading and is why most professionals use CARR (compounded annual rate of return).

      2008 took back all the returns since 2002 and possibly even back to 1997. there has been some recovery, but just betting the indexes even now has led to no principal return since 1999. that’s 13 years of flat.

      averaging may have driven this up some, but the returns over the past 15 years to averaging are a 2%ish carr, but that’s pretty dire historically.

      you’d have been better off in bonds.

      • morganovich: “you’d have been better off in bonds.”

        Asset allocation always includes bonds to buffer those down years you speak of (my asset mix is about 50% domestic stock, 20% foreign stock and 30% domestic and foreign bonds). I am not a professional trying to beat the market or you and Methinks. I need 1/2% a month return (6% a year) to meet my current cash outflows and not cash my GM pension or college paychecks (I’m at 1.59% for this month so far).

        I enjoy your and Methinks viewpoints here: thanks!

    • Well, my periods are ten seconds, if I had my way. But, I’m not investing.

      Walt, I don’t think you understand my point. It’s good that you’re investing periodically when investment funds become available and that you’re not trying to time investments and panicking in and out. A lot of financial advisers claim that you can outperform the market (for which the proxy is the index) with that strategy. You can’t. But, that shouldn’t be your goal unless that’s your profession.

  8. FMAGX’s top holdings look like an OEX knockoff. And the OEX (the top 100 of the S&P 500), which accounts for about 90% of the performance (or lack thereof) of the 500 is at the core of its failed performance problem. That’s why the S&P 500 is a failed benchmark suitable only for garden slugs.

    Bureaucratic, lack of agility, slow moving, unable to quickly take advantage of new opportunity or duck incoming bullets, serving mature and slow growing markets, over-reaserched, over-owned, their story has been out decades ago, nobody left to buy them, fighting the law of large numbers and increasingly tax/regulation targets, etc.–these belugas are hardly representative of American entrepreneurial spirits.

    The major portion of FMAGX’s performance, now a distant memory, was captured in its very early years when it was a small fund with small companies. Today, its the large-cap market.

  9. I got to admit, I do not know what to think of ETFs.

    In my gut, I just don’t feel good about them. I have no reason to suspect them, no evidence to back this up. Just a gut feeling.

    • jon-

      the fact is that they vary a great deal.

      some are very straightforward. the spy mimics the S+P and is probably the most liquid equity contract in the world.

      it’s simple.

      some are disasters. they change their weightings or worse, are constructed in such a way that if you hold them for long periods you are guaranteed to lose money.

      consider the VXX. this looks like an awesome hedge. it spikes when the vix index rises, as it does in a market crash.

      trade it right, and you are a hero, but hold it and you are going to lose your shirt.

      the VXX holds the near and the out month futires contracts on the vix and trades them to keep a 30 day weighting.

      the constant trading friction and contango will eat you alive.

      this is true of a large number of commodities oriented ETF’s.

      of course, this presents an interesting opportunity as well.

      if you are going to short them and bet AGAINST the commodity or volatility, this handicap becomes a tailwind so long as you can get a good borrow rate from your stockloan. (and this can be a problem with some etf’s, so be sure to check it)

      but the plain vanilla ones are safer than mutual funds.

      • Yahoo and Google never heard of Manchester Explorer Fund.

        Post your web site…post your prospectus…post your audited results. Post your trading history. Until then, nobody knows what you bought, what you sold, how much of either you bought and sold or when you did it, how much you you have under management and how much leverage was involved.

        Until then–and we can wait–your claimed “up 9x versus the S&P 500 since 2004″ has absolutely no credibility.

        And I might add, if the S&P 500 was up some 4.5% a year since 2004, and you beat that by your claimed 12% a year, then you were up by about 5% per year. That’s not exactly the 9 bagger that you claim since 2004–its not even a 2 bagger.

        Are you using some kind of super-secret hedge fund performance formula?

        Until then, I will have to view your sorry diatribe as pure kaka.

        • Hold your nose folks !!

          Manchester Explorer Fund didn’t even make the Barrons’ Top 100 Hedge Funds, the bottom 5 of which had average annual returns of 16+% over the past 3 years.

          Hmmmmmmmm…and morganivich is claiming a 9-bagger for his “touted” MEF versus an upward trending S&P 500 since 2004? A 9-bagger in just 8-years, and he didn’t even average 16% annually over an earlier 3-year period? The arithmetic is quite challenging, check your compound interest tables folks.

          The morganivich and MEF aroma is getting pretty heavy here, don’t you think? Isn’t it time for Mark Perry to give this snake-oil, interloper the heave-ho?

          • Not mention that the Barron’s criteria go well beyond returns. Usually, these rankings require the hedge fund to be over a certain size. You could make triple digit annual returns and if you don’t meet the AUM criteria, then you’re not even considered. Another criteria is the number of years the hedge fund has been in existence. So, not finding Morgan’s hedge fund in Barron’s doesn’t mean much.

            But piling on risk in known shitfests like the ultras and then claiming victory because you make a return that is lower than it should be given the risk that you take, is not impressive. You lose to the very high management fee of that ETF and to the negative gamma. It’s especially unimpressive if you (as is clear from your comments, Macdaddy) unknowingly take all that risk.

            You would have been better off taking a levered position in the QQQ.

          • macdaddy-

            you are just making yourself look like a fool.

            small funds do not show up in those indexes in barrons. we are sub $100 million. (about 60mm AUM in 3 funds) we run mostly our own money. you do realize that it would be illegal for me to post results for my fund on an open website, right? that is the sort of advertising that hedge funds are not allowed to do. we can only take accredited investors and cannot solicit investment from people to whom we do not have a direct relationship.

            you are either trying to grandstand by being a liar or are so ignorant of hedge funds that you really ought to pipe down.

            as i said, go look us up on hedgefund.net.

            we’re there.

            you’ll find our numbers and a big plate of humble pie waiting for you.

            those are audited numbers, net of fees.

            you really do not have a leg to stand on here. the facts are all in evidence as is your ignorance.

            also note:

            you have been caught lying.

            goggle manchester explorer fund and you will get multiple results. granted, they do not tell you anyhting useful, but welcome to the hedge fund space.

            funny how guys that lie (as you were just caught doing) always assume that others are lying. nice try though.

            happy investing.

          • “Hmmmmmmmm…and morganivich is claiming a 9-bagger for his “touted” MEF versus an upward trending S&P 500 since 2004? A 9-bagger in just 8-years, and he didn’t even average 16% annually over an earlier 3-year period? The arithmetic is quite challenging, check your compound interest tables folks. ”

            it appears your reading comp is as bad as your math.

            i did not claim a 9 bagger. i claimed 9 times the return of the S+P. you do realize that’s not the same thing, right?

            you really need to stop embarrassing yourself by commenting.

            guys with names like “macdaddy” generally seem to be overcompensating for something. in this case, it would seem to be illiteracy and innumeracy.

        • “And I might add, if the S&P 500 was up some 4.5% a year since 2004, and you beat that by your claimed 12% a year, then you were up by about 5% per year. That’s not exactly the 9 bagger that you claim since 2004–its not even a 2 bagger.”

          are you mathematically illiterate?

          how do you get to 5% by adding 12 to 4.5%?

          you would fail 4th grade with math this bad.

          i am talking about CARR’s. you do know what this is, right?

          compounded annual rate of return?

          we founded the fund in march of 2004.

          since then it is up 233.81%. the S+P is up 25.99%.

          do the math.

          233.81/25.99 = 8.9961X which i rounded to 9 as it is only 4/1000′s off.

          this means we were up a CARR of 14.62% vs 2.65% for the S+P.

          that’s 12 points higher per year, net of all fees.

          you do know how compounding works, right?

          this math is really simple, but as you seem to think that adding 12% return to 4.5% return yields 5%, i have no idea what to say to you.

          or did you (once again) not understand. we beat the S+P by 12 percentage points a year. that is to say that if the S+p were up 10, we were up 22, not up 11.2.

          i have told you where you can find these results in audited, authoritative form.

          go look it up and quit your prattling.

  10. I’m sure, Methinks and Morganovich can learn a great deal from top investors, e.g. Soros, Buffett, and even Keynes, including about portfolio rebalancing and structural breaks.

    • Oh wait. I forgot I learned another thing from Buffet: never make a large investment unless it’s backstopped by taxpayers. In other words, wait until there’s taxpayer blood in the streets.

      From Soros I learned to go big or go home (i.e. bet the house, roll the dice and hope that you’ll get lucky. If you do, write a pretentious book about the “alchemy” of finance).

      From Keynes, I learned a lot of Lordly Wizdumb and that just because you have a title doesn’t mean you know squat about economics. He was mighty peeved about his massive investment losses, btw. To really appreciate his ire you’ll have to carefully read chapter 12 of The General Theory of Lordly Wisdom.

      • Methinks, Buffett and Soros are top investors like Keynes:

        “For the last 22 years of his life, from 1924 to 1946, Keynes was bursar of King’s College, Cambridge, managing its endowment funds.

        Any £100 Keynes invested at the outset would have been worth £1,675 by his death 22 years later (the college tended to spend the income he generated). The same money invested in an index of UK stocks would have grown £424.

        …Keynes belongs among the greatest investors ever.”

        • The Dutch East India company’s return was 14 or 15% for 50 or 60 years! They are the best investors of all time.

          Is there a medal for that? Do we get a t-shirt at least?

        • You know what would have been fabulous? If Keynes just stuck to being a bursar instead of saddling us with his General Theory of General Crap.

          • Methinks, it would be “fabulous” if you actually said something that wasn’t “crap.”

          • Oh, I’m sorry. Where are my manners? Of course the returns for the Dutch company are crap. Worse! I don’t have my prayer book devoted to the Great Lord Keynes. If you provide me with a link to an online version I will join you in your worship of Him tonight.

          • Oooh! You have obviously struck a nerve with Mr. Peak, but don’t worry. He has a lot of nerve.

            He is particularly fond of m’ Lord Keynes.

          • I’m not “fond” of nonsense or ignorance.

            Also, I may add, knowing the difference between a structural bull and bear market can indicate whether the market can rise much higher than before or not.

            Finding absolute and relative “quality” in stocks is an excellent way to invest.

          • This was a very interesting discussion. It took a surprisingly long time for it to turn into the customary food fight.

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