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Picking Investments: Only Two Things Matter

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Re: Picking Investments: Only Two Things Matter

#11

Post by Umalu »

rsepassi wrote: post #9
Tichy wrote: post #4

Who creates the indices, though? And if everybody would act like that, the system would fail, because nobody would trade stock anymore.

Tichy is exactly right, and this point on its own makes passive investing extremely dangerous (though I tend to agree that on average, putting your money with an active money manager is even more dangerous). The indices are rather arbitrary and set by institutions whose incentives have nothing to do with investor returns. The securities included in the indices are in no way selected for expected performance, and it's…

You make useful points. The efficient market hypothesis, particularly in its stronger forms, is in retreat. Value investors like Buffett are a big reason for this. But... for most people without the skill or the time to find the next great investment or the next great investment manager, index investing offers the lowest cost of investment and, if you dollar-cost average over a long enough time, you will invest in up and down markets, thereby minimizing your market timing risk. Clearly this is not a swing-for-the-fences investing strategy, but for most people it is good enough.

Re: Picking Investments: Only Two Things Matter

#12

Post by rsepassi »

cloudkj wrote: post #10
rsepassi wrote: post #9

Earlier quoted context omitted.

Tichy is exactly right, and this point on its own makes passive investing extremely dangerous (though I tend to agree that on average, putting your money with an active money manager is even more dangerous). The indices are rather arbitrary and set by institutions whose incentives have nothing to do with investor returns. The securities included in the indices are in no way selected for expected performance, and it's…

I think you're taking quite an extreme interpretation of Graham's/Buffet's thoughts on index investing. It's a given that, with index investing, your returns will match the market. Index investing isn't aimed at getting higher returns. Rather, Graham actually spends more time discussing and differentiating between different classes of investors. For the "enterprising investor", s/he can afford to spend more time to f…

I did not intend to portray extreme views, and I believe that I've represented their views fairly. Buffett recommends index investing, but also believes that it provides great opportunity for the enterprising investor because of its passivity and ignorance of security values. Graham did indeed differentiate between the "enterprising" and "defensive" investor, but did not recommend an index approach to investing, even for the defensive investor, as he specifically recommends that no security should be bought at a price over 20x its earnings (Ch. 5). Graham recognized that the "defensive" or passive investor does not have the time, energy, or expertise necessary to engage in rigorous security selection, but ignorance does not protect an investor from risk - risk here being defined as risk of permanent capital impairment, which is the risk of overpaying for a security.

My basic point is that every investor, passive or active, must protect him or herself against the risk of overpaying. Passive index investing does not protect you from this risk, and is therefore very dangerous.

Fully agreed that good investing is pretty much totally dependent on how much work and emotional discipline you're willing to put into it.

Re: Picking Investments: Only Two Things Matter

#13

Post by m4wk3r »

ahi wrote: post #6
ct wrote: post #5

Earlier quoted context omitted.

Respectfully disagree about not dipping into your IRA to fund a startup if you're driven to succeed and raising capital otherwise falls through. Just make sure it's for the right idea and it'll pay multiples over the crappy returns the S&P has over the past 10 years (which is almost nothing).

Everyone thinks they have "the right idea and it'll pay multiples over the crappy returns the S&P has over the past 10 years."

on the other hand, most people are idiots.

Re: Picking Investments: Only Two Things Matter

#14

Post by johnrob »

patio11 wrote: post #2

2b) Tax consequences matter. Take advantage of options to reduce them, for example by fully funding your IRA. Particularly for the young kids here, you should be maxing your IRA every year if you're debt free. (And you should not, not, not tap it when you change jobs, want to fund a startup or wedding, etc.)

Most people's IRA money is a drop in the pan compared to the market rate salary people forgo to pursue a startup. If your value system has you protecting your IRA, it should also have you earning a full salary.

Re: Picking Investments: Only Two Things Matter

#15

Post by nowarninglabel »

ct wrote: post #5
patio11 wrote: post #2

2b) Tax consequences matter. Take advantage of options to reduce them, for example by fully funding your IRA. Particularly for the young kids here, you should be maxing your IRA every year if you're debt free. (And you should not, not, not tap it when you change jobs, want to fund a startup or wedding, etc.)

Respectfully disagree about not dipping into your IRA to fund a startup if you're driven to succeed and raising capital otherwise falls through. Just make sure it's for the right idea and it'll pay multiples over the crappy returns the S&P has over the past 10 years (which is almost nothing).

http://www.nytimes.com/interactive/2011/01/02/business/20110... A longer timeline of perspective to enhance your comment.

Re: Picking Investments: Only Two Things Matter

#16

Post by aerique »

m4wk3r wrote: post #13
ahi wrote: post #6

Earlier quoted context omitted.

Everyone thinks they have "the right idea and it'll pay multiples over the crappy returns the S&P has over the past 10 years."

on the other hand, most people are idiots.

Which is why they should listen to patio11 (and won't).

Re: Picking Investments: Only Two Things Matter

#18

Post by yannickt »

Asset allocation matters. Investors who took the time to develop a plan, figure out an asset allocation that matches their risk tolerance, and actually rebalanced periodically to adjust their portfolio back to their allocation target, probably did just fine during the so-called lost decade.

Tax efficiency matters. A badly designed portfolio may lose 1% a year to taxes. Tax-inefficient investments should be held in tax-advantaged accounts (e.g. tax-free or tax-deferred accounts).

And it matters that you have the discipline to stick to your plan through all market conditions.

Re: Picking Investments: Only Two Things Matter

#19

Post by yannickt »

ct wrote: post #5
patio11 wrote: post #2

2b) Tax consequences matter. Take advantage of options to reduce them, for example by fully funding your IRA. Particularly for the young kids here, you should be maxing your IRA every year if you're debt free. (And you should not, not, not tap it when you change jobs, want to fund a startup or wedding, etc.)

Respectfully disagree about not dipping into your IRA to fund a startup if you're driven to succeed and raising capital otherwise falls through. Just make sure it's for the right idea and it'll pay multiples over the crappy returns the S&P has over the past 10 years (which is almost nothing).

"crappy returns the S&P has over the past 10 years"

The returns were only crappy for those who invested a lump sum at the peak in 2000 and never reinvested dividends.

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