Why not follow Buffett’s mantra?

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GibsonL6s
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Re: Why not follow Buffet’s mantra?

Post by GibsonL6s »

As others have mentioned Buffet can invest in securities he engineers to provide upside while protecting the downside. Additionally, he can buy entire businesses at attractive prices due to his liquid position. On the stock side, I remember seeing an interview where he mentioned the sheer volume of reading he does of annual reports to know exactly what he wants to buy when it goes on sale.

I personally do not have the time to dedicate to that amount of research, but good luck!!
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burritoLover
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Re: Why not follow Buffet’s mantra?

Post by burritoLover »

Bank P/Es aren't comparable to the broad market or tech stocks or whatever. JPM's PE is currently 10.x - it was as low as 4.x in the last 10-ish years.
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Re: Why not follow Buffet’s mantra?

Post by Logan Roy »

I believe there was a famous academic refutation of Efficient Markets, that showed the level of volatility in markets seemed much larger than would be predicted based on the amount and impact of information being priced in.. I think the Covid mini-crash was an example – as was the flash crash, of course – when you have lots of Stops being hit, and forced de-risking from strategies like risk parity, fundamentals can go out the window for a bit.

There's also broad market selling, esp. in international stocks, where quality/defensive businesses sell-off sharply, when they probably shouldn't.. In the UK, with a lot of illiquid Investment Trusts in the indexes, we had things going to 80-90% discounts during the covid panic.. It's obviously hard to prove that isn't the pricing in of legitimate risk – but when liquidity dries up, and people want their money, I wouldn't bank on things being particularly efficient.
km91
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Re: Why not follow Buffet’s mantra?

Post by km91 »

nisiprius wrote: Wed Mar 22, 2023 5:21 pm It is no more useful than "Buy low, sell high."
Buy low, sell high is very easy. I do it every quarter when I rebalance my portfolio back to target weights
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Re: Why not follow Buffet’s mantra?

Post by MMiroir »

nisiprius wrote: Thu Mar 23, 2023 7:05 am
MMiroir wrote: Wed Mar 22, 2023 7:08 pm
nisiprius wrote: Wed Mar 22, 2023 5:21 pm I think the quotation, at least as usually attributed, is "Be fearful when others are greedy, and greedy when others are fearful."
"The time to buy is when there's blood in the streets."

- Baron Rothschild
There's no evidence he said it. The earliest mention of the story is from 1894, almost twenty years after he supposedly said it, and begins feebly "It is related..." Most important, the reference was to literal blood in literal streets during the Paris Commune. Full background including 1894 and later versions of the story.
Another good one is "When the legend becomes fact, print the legend."
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Re: Why not follow Buffet’s mantra?

Post by Garco »

I'm long retired (9 years). Buying and selling is a very small part of my investment management. I do have an old home to sell, however, the net from which would make a nice contribution to my daughter's housing fund.
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Re: Why not follow Buffet’s mantra?

Post by km91 »

Logan Roy wrote: Thu Mar 23, 2023 10:07 am There's also broad market selling, esp. in international stocks, where quality/defensive businesses sell-off sharply, when they probably shouldn't.. In the UK, with a lot of illiquid Investment Trusts in the indexes, we had things going to 80-90% discounts during the covid panic.. It's obviously hard to prove that isn't the pricing in of legitimate risk – but when liquidity dries up, and people want their money, I wouldn't bank on things being particularly efficient.
Illiquidity is a risk. If you hold an illiquid trust and need money now, you will need to pay for liquidity. If an illiquid trust was trading at an 80% discount on a normal day, that would be inefficient. Trading at a discount when liquidity is most in demand would seem to be efficient
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Re: Why not follow Buffet’s mantra?

Post by homebuyer6426 »

toddthebod wrote: Wed Mar 22, 2023 6:00 pm Imagine, it's March of 2000. You have all your equities in VTSMX, Vanguard's Total Market index fund. The NASDAQ peaks at just a hair over 5,000, then *pop*, tech stocks start to crater. Being the exceptional market timer, you wait until May 24, 2000, when the NASDAQ falls to 3,100 (down almost 40%), and you move 20% of your equities money over to the brand new QQQ, an ETF that invests in the largest stocks trading on the NASDAQ exchange.

It starts to go up. You're feeling pretty good about yourself as it grows 34% over the next two months! Ready to ride it back to it's previous lofty peak, you recoil in horror as it starts to trend down again. No sudden crash, but month after month you watch your money dribble away, finally hitting bottom in September, 2002, down over 70% since you made your investment.

Meanwhile, your total market investment has only fallen a bit over 30%. Not wanting to "lock-in" losses, you leave your QQQ investment alone, and you watch as it takes eleven more years to recover your initial investment, while your total market fund has recovered it's losses by 2005.

Finally, having recovered your initial investment, you realize the folly of your ways, and you sell your QQQ shares and put it all back into the total market fund in September 2013. Then you sit back and watch as QQQ returns 16% per year over the next ten years, handily outpacing the 11% earned by your total market fund.

And that's why I don't try to time the market.
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Re: Why not follow Buffet’s mantra?

Post by secondopinion »

Logan Roy wrote: Thu Mar 23, 2023 10:07 am I believe there was a famous academic refutation of Efficient Markets, that showed the level of volatility in markets seemed much larger than would be predicted based on the amount and impact of information being priced in.. I think the Covid mini-crash was an example – as was the flash crash, of course – when you have lots of Stops being hit, and forced de-risking from strategies like risk parity, fundamentals can go out the window for a bit.

There's also broad market selling, esp. in international stocks, where quality/defensive businesses sell-off sharply, when they probably shouldn't.. In the UK, with a lot of illiquid Investment Trusts in the indexes, we had things going to 80-90% discounts during the covid panic.. It's obviously hard to prove that isn't the pricing in of legitimate risk – but when liquidity dries up, and people want their money, I wouldn't bank on things being particularly efficient.
I know a lot of the liquidity was gone, and it was easy money for me; I have made quite a bit on illiquidity (and I can say that market timing does work in these cases). Now, the opportunity cost to wait for these events does call to question whether staying in stocks the entire time is better in the long-run (the supposed metric to compare against); however, I am not going to question the hiccups in my favor when everything is going sour otherwise.
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Re: Why not follow Buffet’s mantra?

Post by DesertDiva »

VSTAX already has ~14% in the financial sector, and the equivalent Fidelity fund has slightly less.

I am comfortable with that percentage in my portfolio. Loading up on a certain sector doesn’t align with my desire for a diversified portfolio.
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Re: Why not follow Buffet’s mantra?

Post by MMiroir »

km91 wrote: Thu Mar 23, 2023 10:40 am Illiquidity is a risk. If you hold an illiquid trust and need money now, you will need to pay for liquidity. If an illiquid trust was trading at an 80% discount on a normal day, that would be inefficient. Trading at a discount when liquidity is most in demand would seem to be efficient
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Re: Why not follow Buffet’s mantra?

Post by Logan Roy »

km91 wrote: Thu Mar 23, 2023 10:40 am
Logan Roy wrote: Thu Mar 23, 2023 10:07 am There's also broad market selling, esp. in international stocks, where quality/defensive businesses sell-off sharply, when they probably shouldn't.. In the UK, with a lot of illiquid Investment Trusts in the indexes, we had things going to 80-90% discounts during the covid panic.. It's obviously hard to prove that isn't the pricing in of legitimate risk – but when liquidity dries up, and people want their money, I wouldn't bank on things being particularly efficient.
Illiquidity is a risk. If you hold an illiquid trust and need money now, you will need to pay for liquidity. If an illiquid trust was trading at an 80% discount on a normal day, that would be inefficient. Trading at a discount when liquidity is most in demand would seem to be efficient
I think that's stretching a theory beyond the point the numbers make sense.. Sure, maybe an investor needs to cash out a private debt trust on a Wednesday in a market panic – but does that justify a 900% premium for holding on a few days?

We could say it accurately reflects the chance of the trust going bankrupt at that moment, but it's very hard to prove that the market's really doing that calculation in the moment, when we know that there are ETFs flooding the market with these shares, of which they're forced sellers.
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Re: Why not follow Buffet’s mantra?

Post by Logan Roy »

secondopinion wrote: Thu Mar 23, 2023 10:55 am
Logan Roy wrote: Thu Mar 23, 2023 10:07 am I believe there was a famous academic refutation of Efficient Markets, that showed the level of volatility in markets seemed much larger than would be predicted based on the amount and impact of information being priced in.. I think the Covid mini-crash was an example – as was the flash crash, of course – when you have lots of Stops being hit, and forced de-risking from strategies like risk parity, fundamentals can go out the window for a bit.

There's also broad market selling, esp. in international stocks, where quality/defensive businesses sell-off sharply, when they probably shouldn't.. In the UK, with a lot of illiquid Investment Trusts in the indexes, we had things going to 80-90% discounts during the covid panic.. It's obviously hard to prove that isn't the pricing in of legitimate risk – but when liquidity dries up, and people want their money, I wouldn't bank on things being particularly efficient.
I know a lot of the liquidity was gone, and it was easy money for me; I have made quite a bit on illiquidity (and I can say that market timing does work in these cases). Now, the opportunity cost to wait for these events does call to question whether staying in stocks the entire time is better in the long-run (the supposed metric to compare against); however, I am not going to question the hiccups in my favor when everything is going sour otherwise.
Same. It's knowing that when Stops are being hit, and institutional funds are forced to de-risk, and ETFs are having to flood the market with shares, there probably just aren't enough buyers for small, specialist funds – many of which are too small/illiquid for hedge funds to bother with anyway.

Covid was a fantastic opportunity. My best year by far. With me, I hadn't really been sitting in cash, but when volatility picked up, I had a few Stop Losses hit quite early on, and they took me below my minimum stock allocation. So I had to buy back in as the market was bottoming. And there were 100-150% returns on funds over the next 9 months, if you got it right – but also >150% on random trusts coming off huge discounts.

So I look out for those events. I missed the UK's bond crisis in 2022, but my active funds all capitalised on it.
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Re: Why not follow Buffet’s mantra?

Post by ChinchillaWhiplash »

DesertDiva wrote: Thu Mar 23, 2023 10:57 am VSTAX already has ~14% in the financial sector, and the equivalent Fidelity fund has slightly less.

I am comfortable with that percentage in my portfolio. Loading up on a certain sector doesn’t align with my desire for a diversified portfolio.
Hate to break it to you but VTI’s top 10 holdings make up > 20% of the fund. Is heavily tilted wether you want it to be or not. And that is to the tech sector.
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Re: Why not follow Buffet’s mantra?

Post by km91 »

Logan Roy wrote: Thu Mar 23, 2023 12:30 pm I think that's stretching a theory beyond the point the numbers make sense.. Sure, maybe an investor needs to cash out a private debt trust on a Wednesday in a market panic – but does that justify a 900% premium for holding on a few days?

We could say it accurately reflects the chance of the trust going bankrupt at that moment, but it's very hard to prove that the market's really doing that calculation in the moment, when we know that there are ETFs flooding the market with these shares, of which they're forced sellers.
I can't say what is or isn't justified for a particular fund or trust but the market really is doing the calculation in the moment; that's what the price is. If some other market participant could provide liquidity at a cheaper discount presumably they would and take the near risk-free return for themselves, assuming they have good reason to believe the market price will recover by Thursday or Friday. If you had to sell your home by the close of business today how much of a discount would you need to give to get the deal done? What if everyone else is also trying to sell their house?
Last edited by km91 on Thu Mar 23, 2023 1:18 pm, edited 2 times in total.
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Re: Why not follow Buffet’s mantra?

Post by Brianmcg321 »

I'm not a Buffethead
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Re: Why not follow Buffet’s mantra?

Post by nisiprius »

Logan Roy wrote: Thu Mar 23, 2023 10:07 am I believe there was a famous academic refutation of Efficient Markets, that showed the level of volatility in markets seemed much larger than would be predicted based on the amount and impact of information being priced in..
Well, try to find and cite that famous academic refutation, please, so we'll know where we're at.

The efficient market hypothesis does not say that the price is always right. It only says that pricing is a random walk around the right price, and therefore you cannot use analysis of price movements to beat the market. I don't think anything about the efficient market hypothesis predicts the degree of volatility.
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Re: Why not follow Buffet’s mantra?

Post by Stubbie »

toddthebod wrote: Wed Mar 22, 2023 6:00 pm Imagine, it's March of 2000. You have all your equities in VTSMX, Vanguard's Total Market index fund. The NASDAQ peaks at just a hair over 5,000, then *pop*, tech stocks start to crater. Being the exceptional market timer, you wait until May 24, 2000, when the NASDAQ falls to 3,100 (down almost 40%), and you move 20% of your equities money over to the brand new QQQ, an ETF that invests in the largest stocks trading on the NASDAQ exchange.

It starts to go up. You're feeling pretty good about yourself as it grows 34% over the next two months! Ready to ride it back to it's previous lofty peak, you recoil in horror as it starts to trend down again. No sudden crash, but month after month you watch your money dribble away, finally hitting bottom in September, 2002, down over 70% since you made your investment.

Meanwhile, your total market investment has only fallen a bit over 30%. Not wanting to "lock-in" losses, you leave your QQQ investment alone, and you watch as it takes eleven more years to recover your initial investment, while your total market fund has recovered it's losses by 2005.

Finally, having recovered your initial investment, you realize the folly of your ways, and you sell your QQQ shares and put it all back into the total market fund in September 2013. Then you sit back and watch as QQQ returns 16% per year over the next ten years, handily outpacing the 11% earned by your total market fund.

And that's why I don't try to time the market.
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Re: Why not follow Buffet’s mantra?

Post by a_posteriori »

'Buying when others are fearful' can be done IMO, but those clear opportunities rarely happen and there are risks involved as always. Buffet has always had cash on hand to allocate when the conditions he and his cohort felt met their requirements for the cash to be allocated. As a small personal investor the having excess cash to allocate opportunity has happened only once in my investing lifetime. 2008-2009. If I remember the DOW bottom was around 6500. I bought a good sized additional allocation of a Vanguard fund I already owned. I wish today I had allocated more cash! I bought within a few days of the bottom, but I was fearful at least in the back of my mind, to allocate more. That relatively small cash to stock allocation has produce well, so my risk taking turned out well. It may not always turn out that way next time.
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Re: Why not follow Buffet’s mantra?

Post by Fallible »

Just a general comment to say that what investors can best learn from Buffett is detailed in Larry Swedroe's book, Think, Act, and Invest Like Warren Buffett: The Winning Strategy to Help You Achieve Your Financial and Life Goals. .

"The sad truth," Swedroe writes, "is that while Buffett is widely admired, the majority of investors not only fail to consider his advice, but tend to do exactly the opposite of what he recommends."
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
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Re: Why not follow Buffet’s mantra?

Post by Logan Roy »

km91 wrote: Thu Mar 23, 2023 1:10 pm
Logan Roy wrote: Thu Mar 23, 2023 12:30 pm I think that's stretching a theory beyond the point the numbers make sense.. Sure, maybe an investor needs to cash out a private debt trust on a Wednesday in a market panic – but does that justify a 900% premium for holding on a few days?

We could say it accurately reflects the chance of the trust going bankrupt at that moment, but it's very hard to prove that the market's really doing that calculation in the moment, when we know that there are ETFs flooding the market with these shares, of which they're forced sellers.
I can't say what is or isn't justified for a particular fund or trust but the market really is doing the calculation in the moment; that's what the price is. If some other market participant could provide liquidity at a cheaper discount presumably they would and take the near risk-free return for themselves, assuming they have good reason to believe the market price will recover by Thursday or Friday. If you had to sell your home by the close of business today how much of a discount would you need to give to get the deal done? What if everyone else is also trying to sell their house?
I can easily construct faith-based arguments. It's just whether you take EMH as a hypothesis, or a fundamental law of the universe over all scales.

An illiquid asset *is* defined by the fact a buyer isn't always there. So the quicker you have to sell something, the poorer price you're going to get.
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Re: Why not follow Buffet’s mantra?

Post by Logan Roy »

nisiprius wrote: Thu Mar 23, 2023 1:19 pm
Logan Roy wrote: Thu Mar 23, 2023 10:07 am I believe there was a famous academic refutation of Efficient Markets, that showed the level of volatility in markets seemed much larger than would be predicted based on the amount and impact of information being priced in..
Well, try to find and cite that famous academic refutation, please, so we'll know where we're at.

The efficient market hypothesis does not say that the price is always right. It only says that pricing is a random walk around the right price, and therefore you cannot use analysis of price movements to beat the market. I don't think anything about the efficient market hypothesis predicts the degree of volatility.
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Re: Why not follow Buffet’s mantra?

Post by firebirdparts »

The big hazard is the high cost of having something to buy something with. If you had invested it already, you'd be way ahead. That's the normal outcome.

If you have some reason that you're not 100% equities, then it's pretty easy to come up with a set of rules to shift toward equities based on how far they fall. But again, you need a reason to not be 100% equities that ISN'T "so I can do this". And then you also need to have a reason why that doesn't apply anymore when the market falls a certain amount.
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Re: Why not follow Buffet’s mantra?

Post by firebirdparts »

Logan Roy wrote: Thu Mar 23, 2023 10:07 am There's also broad market selling, esp. in international stocks, where quality/defensive businesses sell-off sharply, when they probably shouldn't.. In the UK, with a lot of illiquid Investment Trusts in the indexes, we had things going to 80-90% discounts during the covid panic.. It's obviously hard to prove that isn't the pricing in of legitimate risk – but when liquidity dries up, and people want their money, I wouldn't bank on things being particularly efficient.
I don't know why you'd try to argue that. Much better and safer to argue that people are pricing legitimate risk the best they can. Bankruptcy is really a pretty common event. It seems like that should be way more common than, say, a 90% discount caused by inefficiency. That said, I did buy shares in my own employer during the GFC because of what looked to me like an absurd level of inefficiency. So I guess I feel like I know it when I see it, maybe.
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Re: Why not follow Buffet’s mantra?

Post by Charles Joseph »

ChinchillaWhiplash wrote: Wed Mar 22, 2023 5:13 pm “Buy when others are fearful”. Does it make sense to back up the truck to sector funds such as financials? Seems like a good time to get a huge discount. You might have to sit on it until it rebounds but you would do that with any holding. What would having 10-15% of portfolio in this matter as far as the downside. Could go down more. If it does just DCA into it. Is this any worse or riskier than holding something such as a REIT fund at these percentages?
"Be fearful when others are greedy, and greedy when others are fearful."

I think Bogleheads do that in a measured, reasonable way when we rebalance into an underperforming asset.

It's easy to forget that most of the investing world piles into over-performing assets, while Bogleheads sell over-performing assets and rebalance into underperforming assets.
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Re: Why not follow Buffet’s mantra?

Post by Logan Roy »

firebirdparts wrote: Thu Mar 23, 2023 4:08 pm
Logan Roy wrote: Thu Mar 23, 2023 10:07 am There's also broad market selling, esp. in international stocks, where quality/defensive businesses sell-off sharply, when they probably shouldn't.. In the UK, with a lot of illiquid Investment Trusts in the indexes, we had things going to 80-90% discounts during the covid panic.. It's obviously hard to prove that isn't the pricing in of legitimate risk – but when liquidity dries up, and people want their money, I wouldn't bank on things being particularly efficient.
I don't know why you'd try to argue that. Much better and safer to argue that people are pricing legitimate risk the best they can. Bankruptcy is really a pretty common event. It seems like that should be way more common than, say, a 90% discount caused by inefficiency. That said, I did buy shares in my own employer during the GFC because of what looked to me like an absurd level of inefficiency. So I guess I feel like I know it when I see it, maybe.
I don't think it's 'safe' to give so much weight to a theory that we stop trying to be objective. To come at it from another angle: if an Investment Trust of publicly traded assets is on a 50% discount, then either the trust or the assets are likely mispriced. And Investment Trust discounts have been considered an exemption from EMH for this reason.
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Re: Why not follow Buffet’s mantra?

Post by nedsaid »

nisiprius wrote: Thu Mar 23, 2023 7:05 am
MMiroir wrote: Wed Mar 22, 2023 7:08 pm
nisiprius wrote: Wed Mar 22, 2023 5:21 pm I think the quotation, at least as usually attributed, is "Be fearful when others are greedy, and greedy when others are fearful."
"The time to buy is when there's blood in the streets."

- Baron Rothschild
There's no evidence he said it. The earliest mention of the story is from 1894, almost twenty years after he supposedly said it, and begins feebly "It is related..." Most important, the reference was to literal blood in literal streets during the Paris Commune. Full background including 1894 and later versions of the story.

More important, there are at least a dozen handy-dandy maxims around that you can use to provide confirmation bias of whatever thing you've already decided to do. Just select the one that reassures you and feel wise.

The market is down and you want to buy?
"Buy low, sell high."
"Be fearful when others are greedy, and greedy when others are fearful."
"Buy when there's blood in the street."

The market is down and you want to sell?
"Cut your losses and let your profits run."
"Don't try to catch a falling knife."
"Don't fight the dominant trend of the market."
"Be fearful when others are greedy, and greedy when others are fearful."

The market is up and you want to sell?
"Buy low, sell high."
"Nobody ever went broke taking a profit."
"Bulls make money and bears make money but pigs get slaughtered."

The market is up and you want to buy?
"The trend is your friend."
"Cut your losses and let your profits run."
"You're playing with house money, now."

A universal one that works no matter what is happening is "Don't fight the Fed."
The reason these maxims are popular is that there is a grain of truth to them. But certainly it is a flawed approach to invest by blindly following them. Another flaw to these maxims is that there is a certain amount of nuance to investing, the point might be largely true but there are all kinds of exceptions.

Of these sayings, there are a few that I subscribe to but with limits.

Certainly I subscribe to the saying, "Don't fight the tape and don't fight the Fed." I remember when stocks starting hitting all-time highs in mid-2013, I was joking that I didn't know what to do. Pretty much, it had been so long since stocks were at all-time highs, that I forgot what it felt like. It is easy to be skeptical of market rallies, so much so that we forget to enjoy bull markets. We want to fight the tape on the way up.

I have my annual tradition of crying in my root beer around New Years' over my investment results. For years, I have bought root beer and a good vanilla ice cream and celebrated New Years' by making root beer floats. Having a Value tilted portfolio, I had some years of disappointment as Value underperformed Large Growth. Hence, the crying in my root beer.

One big reason for my disappointment was that I didn't let my winners run after July 2013 as I pretty aggressively rebalanced from stocks to bonds with narrow rebalancing bands. I fought the tape all the way up until the Covid bear market of 2020 and the recent bear market of 2022 going into 2023. This doubtlessly hampered my investment performance.

No wonder I was disappointed in my investment results. I was too scared to rebalance from stocks to bonds during the 2008-2009 bear market, and I kept harvesting gains as the stock market hit new highs after July 2013. I didn't let the bull market run. I had good reasons for doing that. For one thing, I was at 69% stocks in 2013 and I wanted to start the de-risking process as I turned 54 years old. The second reason was that an overconfident and exuberant Nedsaid refused to rebalance my portfolio when I had the chance in 2007 and early 2008. I swore that I would not let that happen again making the promise to myself that I would both de-risk and rebalance as the markets started hitting all-time highs.

Not only that but my fellow Bogleheads shamed me for having a lackadaisical attitude towards rebalancing. It was sort of like I was lacking in portfolio hygiene and personal virtue. So by golly, I reformed my evil ways with a vengeance. I discussed me new ways with the fervor of a convert and doubtless annoyed many of my fellow forum members.
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Re: Why not follow Buffet’s mantra?

Post by arcticpineapplecorp. »

It's only when the tide goes out that you learn who has been swimming naked
not that one?
No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.
not that one either?

how about this mantra of W.B...
Never ask a barber if you need a haircut.
is that the one?
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
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Re: Why not follow Buffet’s mantra?

Post by averagedude »

Forget about the Buffet mantra. Follow the "chicken mantra" which means that the closest thing to a free lunch is diversification, and don't put all of your eggs in one basket. You never want to make a concentration bet on one sector of the economy.
km91
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Re: Why not follow Buffet’s mantra?

Post by km91 »

Logan Roy wrote: Thu Mar 23, 2023 3:28 pm
I can easily construct faith-based arguments. It's just whether you take EMH as a hypothesis, or a fundamental law of the universe over all scales.

An illiquid asset *is* defined by the fact a buyer isn't always there. So the quicker you have to sell something, the poorer price you're going to get.
I don't know about the universe, but it's pretty close to a fundamental law of markets; if you have information that the market doesn't possess you can earn alpha by pricing it into the market. But what are the chances you or I know something the market doesn't?
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ChinchillaWhiplash
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Re: Why not follow Buffet’s mantra?

Post by ChinchillaWhiplash »

averagedude wrote: Thu Mar 23, 2023 9:34 pm Forget about the Buffet mantra. Follow the "chicken mantra" which means that the closest thing to a free lunch is diversification, and don't put all of your eggs in one basket. You never want to make a concentration bet on one sector of the economy.
Unfortunately if you just hold TSM for US you ARE concentrated. I’ll say it again, that VTI’s top 10 holdings out of 3948 different stocks makes up 21.28% of the entire portfolio. 25.83% of the entire portfolio is information technology. 17.71% of tech holdings in the entire portfolio are in the top 10 holdings. If you throw in BRK it goes up since I’m pretty sure they also hold Apple. If you own the whole haystack you are still sector tilted. Why is it OK to tilt to a sector if that is what the market gives you, but only if that is what the market gives you? I don’t see that as being very diversified. If you are holding just S&P500 it gets even worse.
DesertGator
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Re: Why not follow Buffet’s mantra?

Post by DesertGator »

ChinchillaWhiplash wrote: Wed Mar 22, 2023 5:13 pm “Buy when others are fearful”. Does it make sense to back up the truck to sector funds such as financials? Seems like a good time to get a huge discount. You might have to sit on it until it rebounds but you would do that with any holding. What would having 10-15% of portfolio in this matter as far as the downside. Could go down more. If it does just DCA into it. Is this any worse or riskier than holding something such as a REIT fund at these percentages?
Buffet quotes & sound bites should be considered in the context of who he is and what he does. He does not put himself out there as a retirement planning/investing guru.

Unlike we personal investors, Buffet makes his investment decisions for his going concern which has no planned decumulation stage as far as anyone knows. We however accumulate prior to retirement when we have more risk appetite and then draw down those assets in retirement when we have a declining risk appetite. That isn’t what Buffet does.

Not saying his advice/comments aren’t applicable, just cautioning that not everything he says can/should automatically be mapped to the individual investor.
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Re: Why not follow Buffet’s mantra?

Post by boogiehead »

ChinchillaWhiplash wrote: Thu Mar 23, 2023 11:38 pm
averagedude wrote: Thu Mar 23, 2023 9:34 pm Forget about the Buffet mantra. Follow the "chicken mantra" which means that the closest thing to a free lunch is diversification, and don't put all of your eggs in one basket. You never want to make a concentration bet on one sector of the economy.
Unfortunately if you just hold TSM for US you ARE concentrated. I’ll say it again, that VTI’s top 10 holdings out of 3948 different stocks makes up 21.28% of the entire portfolio. 25.83% of the entire portfolio is information technology. 17.71% of tech holdings in the entire portfolio are in the top 10 holdings. If you throw in BRK it goes up since I’m pretty sure they also hold Apple. If you own the whole haystack you are still sector tilted. Why is it OK to tilt to a sector if that is what the market gives you, but only if that is what the market gives you? I don’t see that as being very diversified. If you are holding just S&P500 it gets even worse.
TSM is not stagnant... just because it happens that technology companies are the talk of the town for the past decade and currently make up over 20% of its holdings doesn't mean it will be that way in 10, 20, 30 years from now.
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Beensabu
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Re: Why not follow Buffet’s mantra?

Post by Beensabu »

ChinchillaWhiplash wrote: Thu Mar 23, 2023 11:38 pm Why is it OK to tilt to a sector if that is what the market gives you, but only if that is what the market gives you?
I think the argument is that it's not a tilt if it's "the market" - it's just the market. Which totally makes sense.

But if "the market" has too much of a concentration in a particular sector (or particular companies) for a person, that's an easy fix. Just tilt to something (anything) else. The tricky bit is "what else"? There are all sorts of answers to that question, but who knows which will end up being the best one.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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Re: Why not follow Buffet’s mantra?

Post by DesertDiva »

ChinchillaWhiplash wrote: Thu Mar 23, 2023 12:52 pm
DesertDiva wrote: Thu Mar 23, 2023 10:57 am VSTAX already has ~14% in the financial sector, and the equivalent Fidelity fund has slightly less.

I am comfortable with that percentage in my portfolio. Loading up on a certain sector doesn’t align with my desire for a diversified portfolio.
Hate to break it to you but VTI’s top 10 holdings make up > 20% of the fund. Is heavily tilted wether you want it to be or not. And that is to the tech sector.
You didn’t break anything to me. In fact, there are 11 different sectors represented by VSTAX. I suppose one of them had to bubble up to first place.
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Re: Why not follow Buffet’s mantra?

Post by Apathizer »

boogiehead wrote: Fri Mar 24, 2023 12:24 am
ChinchillaWhiplash wrote: Thu Mar 23, 2023 11:38 pm
averagedude wrote: Thu Mar 23, 2023 9:34 pm Forget about the Buffet mantra. Follow the "chicken mantra" which means that the closest thing to a free lunch is diversification, and don't put all of your eggs in one basket. You never want to make a concentration bet on one sector of the economy.
Unfortunately if you just hold TSM for US you ARE concentrated. I’ll say it again, that VTI’s top 10 holdings out of 3948 different stocks makes up 21.28% of the entire portfolio. 25.83% of the entire portfolio is information technology. 17.71% of tech holdings in the entire portfolio are in the top 10 holdings. If you throw in BRK it goes up since I’m pretty sure they also hold Apple. If you own the whole haystack you are still sector tilted. Why is it OK to tilt to a sector if that is what the market gives you, but only if that is what the market gives you? I don’t see that as being very diversified. If you are holding just S&P500 it gets even worse.
TSM is not stagnant... just because it happens that technology companies are the talk of the town for the past decade and currently make up over 20% of its holdings doesn't mean it will be that way in 10, 20, 30 years from now.
While I think it's hyperbolic to say the MCW TSM 'isn't very diversified', it's predominately large cap. I would argue tilting somewhat towards small value is more well diversified.
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exodusing
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Re: Why not follow Buffet’s mantra?

Post by exodusing »

Apathizer wrote: Fri Mar 24, 2023 1:49 am
boogiehead wrote: Fri Mar 24, 2023 12:24 am
ChinchillaWhiplash wrote: Thu Mar 23, 2023 11:38 pm
averagedude wrote: Thu Mar 23, 2023 9:34 pm Forget about the Buffet mantra. Follow the "chicken mantra" which means that the closest thing to a free lunch is diversification, and don't put all of your eggs in one basket. You never want to make a concentration bet on one sector of the economy.
Unfortunately if you just hold TSM for US you ARE concentrated. I’ll say it again, that VTI’s top 10 holdings out of 3948 different stocks makes up 21.28% of the entire portfolio. 25.83% of the entire portfolio is information technology. 17.71% of tech holdings in the entire portfolio are in the top 10 holdings. If you throw in BRK it goes up since I’m pretty sure they also hold Apple. If you own the whole haystack you are still sector tilted. Why is it OK to tilt to a sector if that is what the market gives you, but only if that is what the market gives you? I don’t see that as being very diversified. If you are holding just S&P500 it gets even worse.
TSM is not stagnant... just because it happens that technology companies are the talk of the town for the past decade and currently make up over 20% of its holdings doesn't mean it will be that way in 10, 20, 30 years from now.
While I think it's hyperbolic to say the MCW TSM 'isn't very diversified', it's predominately large cap. I would argue tilting somewhat towards small value is more well diversified.
If the average investor (weighted by portfolio size or trading activity) thought a somewhat tilted portfolio was better (on whatever measure of better the market preferred) than the market portfolio, then it would adjust so that a tilted portfolio was the market portfolio.
Leesbro63
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Re: Why not follow Buffett’s mantra?

Post by Leesbro63 »

Would have been a great “Buffettesque buying opportunity in 2008 when the Dow fell to 10,000 from 14,000. Lots of fear.

Oh, wait, it fell by an even larger percentage after that.
Last edited by Leesbro63 on Fri Mar 24, 2023 9:01 am, edited 1 time in total.
Stryker
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Re: Why not follow Buffett’s mantra?

Post by Stryker »

ChinchillaWhiplash wrote: Wed Mar 22, 2023 5:13 pm “Buy when others are fearful”. Does it make sense to back up the truck to sector funds such as financials? Seems like a good time to get a huge discount. You might have to sit on it until it rebounds but you would do that with any holding. What would having 10-15% of portfolio in this matter as far as the downside. Could go down more. If it does just DCA into it. Is this any worse or riskier than holding something such as a REIT fund at these percentages?
I've done something similar since 2010. Whichever sector in our own taxable portfolio is lagging, gets any fresh cash accumulated. I only failed once as a contrarian investor and that was back in the late 90's when I bought a few expensive tech stocks (Nortel, JDS Uniphase, and Research in Motion). Took my losses and just moved on from there back to my value roots. The Canadian financial sector held up very well going through the financial crisis of 2008 through early 2009. One financial stock (a life insurance company, I didn't own shares in at that time) had to cut it's dividend, and that was about it. Aside from the TSE being down around 50% at the time, pretty smooth sailing otherwise. I guess the next big thing was the Canadian oil and gas explorers and producers started falling apart from about 2013 through 2015. A bit too cyclical for me, so I got out of them and haven't returned since. Just stuck with the pipelines in the energy sector and that's about it. Come 2020 after the flash crash, when everyone else seemed to be buying whatever was going up i.e. expensive, I was buying into financial, pipelines and electric utilities that other investors seemed to be selling.....and so it continues. If it's in my watch list and what I want to buy at the time, and other investors don't seem to want it, I'll take it, thank you very much.
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Re: Why not follow Buffet’s mantra?

Post by Logan Roy »

km91 wrote: Thu Mar 23, 2023 10:03 pm
Logan Roy wrote: Thu Mar 23, 2023 3:28 pm
I can easily construct faith-based arguments. It's just whether you take EMH as a hypothesis, or a fundamental law of the universe over all scales.

An illiquid asset *is* defined by the fact a buyer isn't always there. So the quicker you have to sell something, the poorer price you're going to get.
I don't know about the universe, but it's pretty close to a fundamental law of markets; if you have information that the market doesn't possess you can earn alpha by pricing it into the market. But what are the chances you or I know something the market doesn't?
It's clearly a fundamental belief, and it's usually the best default position. But if you understand economies, you can ask things like: did 10yr yields at 1% make any sense when stocks were on earnings yields of 4%? (assuming knowledge of what yields on these assets say about an economy.)

What we can know is that one of the markets is completely wrong – and which would be wrong would come down to inflation. As Dalio said "absolutely insane to hold bonds at these prices," because you could bet on both outcomes without having to hold Treasuries. Does our belief in efficient markets shut down the possibility that monetary policy and investor behaviour can distort asset pricing in certain situations? If so, all you can do is preach, and we all know the 'strong EMH' case. You can't argue against it with someone who can't accept anything else.
km91
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Re: Why not follow Buffet’s mantra?

Post by km91 »

Logan Roy wrote: Fri Mar 24, 2023 8:53 am Does our belief in efficient markets shut down the possibility that monetary policy and investor behaviour can distort asset pricing in certain situations?
Distort prices from what though? My determination of fair value? Your determination of fair value? Going back to the illiquid asset example, if liquidity dries up but you need to sell the asset to raise cash, the fact that you think an 80% or 90% discount is irrational isn't relevant. The price is the price, the market may be "wrong" but in that moment you are just as wrong
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Re: Why not follow Buffet’s mantra?

Post by Apathizer »

exodusing wrote: Fri Mar 24, 2023 6:52 am
Apathizer wrote: Fri Mar 24, 2023 1:49 am
boogiehead wrote: Fri Mar 24, 2023 12:24 am
ChinchillaWhiplash wrote: Thu Mar 23, 2023 11:38 pm
averagedude wrote: Thu Mar 23, 2023 9:34 pm Forget about the Buffet mantra. Follow the "chicken mantra" which means that the closest thing to a free lunch is diversification, and don't put all of your eggs in one basket. You never want to make a concentration bet on one sector of the economy.
Unfortunately if you just hold TSM for US you ARE concentrated. I’ll say it again, that VTI’s top 10 holdings out of 3948 different stocks makes up 21.28% of the entire portfolio. 25.83% of the entire portfolio is information technology. 17.71% of tech holdings in the entire portfolio are in the top 10 holdings. If you throw in BRK it goes up since I’m pretty sure they also hold Apple. If you own the whole haystack you are still sector tilted. Why is it OK to tilt to a sector if that is what the market gives you, but only if that is what the market gives you? I don’t see that as being very diversified. If you are holding just S&P500 it gets even worse.
TSM is not stagnant... just because it happens that technology companies are the talk of the town for the past decade and currently make up over 20% of its holdings doesn't mean it will be that way in 10, 20, 30 years from now.
While I think it's hyperbolic to say the MCW TSM 'isn't very diversified', it's predominately large cap. I would argue tilting somewhat towards small value is more well diversified.
If the average investor (weighted by portfolio size or trading activity) thought a somewhat tilted portfolio was better (on whatever measure of better the market preferred) than the market portfolio, then it would adjust so that a tilted portfolio was the market portfolio.
There is no single 'average' investor. The MCW portfolio is the average of all investors, so if all or most investors tilted, then yes that would become MCW, so it wouldn't be tilted anymore. While more investors do seem to be tilting, it seems unlikely all or most of them will.
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exodusing
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Re: Why not follow Buffet’s mantra?

Post by exodusing »

Apathizer wrote: Fri Mar 24, 2023 10:29 am
exodusing wrote: Fri Mar 24, 2023 6:52 am
Apathizer wrote: Fri Mar 24, 2023 1:49 am
boogiehead wrote: Fri Mar 24, 2023 12:24 am
ChinchillaWhiplash wrote: Thu Mar 23, 2023 11:38 pm

Unfortunately if you just hold TSM for US you ARE concentrated. I’ll say it again, that VTI’s top 10 holdings out of 3948 different stocks makes up 21.28% of the entire portfolio. 25.83% of the entire portfolio is information technology. 17.71% of tech holdings in the entire portfolio are in the top 10 holdings. If you throw in BRK it goes up since I’m pretty sure they also hold Apple. If you own the whole haystack you are still sector tilted. Why is it OK to tilt to a sector if that is what the market gives you, but only if that is what the market gives you? I don’t see that as being very diversified. If you are holding just S&P500 it gets even worse.
TSM is not stagnant... just because it happens that technology companies are the talk of the town for the past decade and currently make up over 20% of its holdings doesn't mean it will be that way in 10, 20, 30 years from now.
While I think it's hyperbolic to say the MCW TSM 'isn't very diversified', it's predominately large cap. I would argue tilting somewhat towards small value is more well diversified.
If the average investor (weighted by portfolio size or trading activity) thought a somewhat tilted portfolio was better (on whatever measure of better the market preferred) than the market portfolio, then it would adjust so that a tilted portfolio was the market portfolio.
There is no single 'average' investor. The MCW portfolio is the average of all investors, so if all or most investors tilted, then yes that would become MCW, so it wouldn't be tilted anymore. While more investors do seem to be tilting, it seems unlikely all or most of them will.
There's a construct economists call a "representative" investor which can serve as proxy for the average investor. Or use average weighted by portfolio size or trading, which was recently suggested by Robert Merton on the rational reminder podcast. It doesn't really matter if there is or isn't some identifiable institution or individual.

Presumably the goal of a more well diversified portfolio is to have a better portfolio. Presumably everyone wants a better portfolio. If markets are efficient, it's hard to see how a tilt is more diversified - the average and therefore the market would move there. Of course, you might be meaningfully different from the representative/average investor, in which case a tilt may well be an improvement over the market portfolio for you, but the bare assertion that a tilt is more diversified does not appear consistent with market efficiency. Everyone can't tilt in the same direction.
km91
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Re: Why not follow Buffet’s mantra?

Post by km91 »

exodusing wrote: Fri Mar 24, 2023 11:04 am If markets are efficient, it's hard to see how a tilt is more diversified - the average and therefore the market would move there.
I don't think there's really an expectation that efficient markets will produce the most diversified portfolio for the average investor. The top 500 US companies make up 80% of the MCW of VTI, the bottom 4000 companies make up 20%. Are these weights really the most diversified portfolio a US investor could hold?
Apathizer
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Re: Why not follow Buffet’s mantra?

Post by Apathizer »

km91 wrote: Fri Mar 24, 2023 11:16 am
exodusing wrote: Fri Mar 24, 2023 11:04 am If markets are efficient, it's hard to see how a tilt is more diversified - the average and therefore the market would move there.
I don't think there's really an expectation that efficient markets will produce the most diversified portfolio for the average investor. The top 500 US companies make up 80% of the MCW of VTI, the bottom 4000 companies make up 20%. Are these weights really the most diversified portfolio a US investor could hold?
No they aren't. MCW weights are efficient more than anything else, and reasonably well-diversified. As you said though, they're mostly large cap, which, IMO is their only fairly minor shortcoming.

A MCW is inexpensive and low maintenance since it's largely automatically adjusting. But a factor-tilted portfolio has is more well diversified since it holds more than a token amount of small and mid caps.
Last edited by Apathizer on Fri Mar 24, 2023 12:42 pm, edited 1 time in total.
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Apathizer
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Re: Why not follow Buffet’s mantra?

Post by Apathizer »

exodusing wrote: Fri Mar 24, 2023 11:04 am Presumably the goal of a more well diversified portfolio is to have a better portfolio. Presumably everyone wants a better portfolio. If markets are efficient, it's hard to see how a tilt is more diversified - the average and therefore the market would move there. Of course, you might be meaningfully different from the representative/average investor, in which case a tilt may well be an improvement over the market portfolio for you, but the bare assertion that a tilt is more diversified does not appear consistent with market efficiency. Everyone can't tilt in the same direction.
Markets are only as rational and efficient as the aggregate of all investors. I think all rational investors want an optimal portfolio, but not all investors necessarily are necessarily rational. Some investors invest heavily dubious, risky areas like meme stocks, crapto, and other highly speculative sectors. A MCW portfolio must hold at least some of these while a tilted portfolio underweights or eliminates them entirely.
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exodusing
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Re: Why not follow Buffet’s mantra?

Post by exodusing »

km91 wrote: Fri Mar 24, 2023 11:16 am
exodusing wrote: Fri Mar 24, 2023 11:04 am If markets are efficient, it's hard to see how a tilt is more diversified - the average and therefore the market would move there.
I don't think there's really an expectation that efficient markets will produce the most diversified portfolio for the average investor. The top 500 US companies make up 80% of the MCW of VTI, the bottom 4000 companies make up 20%. Are these weights really the most diversified portfolio a US investor could hold?
Is a more diversified portfolio a better portfolio? Why wouldn't the market want, and move to, a better portfolio?

Should we consider weightings by number of companies or by the economic value of the companies? Are you better than the market at evaluating economic value?

Just to be clear, the average investor is not the average person, at least not for these purposes. See my representative/average investor post above. Perhaps the marginal price setting investor is another way to look at it. Investing is a highly competitive enterprise.

Efficient is not the same as rational. Efficiency does not guarantee an accurate prices, only a price that incorporates all relevant information in the judgement of the market. If you are better at gathering information and analyzing it than the representative/average/marginal investor, then certainly go for it, you'll do very well.
km91
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Re: Why not follow Buffet’s mantra?

Post by km91 »

Apathizer wrote: Fri Mar 24, 2023 12:01 pm No they aren't. MCW weights are efficient more than anything else, and reasonably well-diversified. As you though, they're mostly large cap, which, IMO is their only fairly minor shortcoming.

A MCW is inexpensive and low maintenance since it's largely automatically adjusting. But a factor-tilted portfolio has is more well diversified since it holds more than a token amount of small and mid caps.
Right, MCW is cheap, easy to maintain, and sufficiently diversified to be a reasonable default choice for the average investor. I tend to think regardless of whether or not size is truly a risk factor in the academic sense that delivers a risk premium, the average investor is probably better off with a bit of a tilt towards small just to reduce some of the concentration risk of having 80% of their cap weight in 10% of investible stocks
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Re: Why not follow Buffett’s mantra?

Post by ChinchillaWhiplash »

One other point I would like to make on my decision to sector tilt into financials. When all of the news is pointing at a problem and the sector drops precipitously, who do you think is buying? I would guess that most of the selling is being done by all the scared retail investors. Those are the people who watch and listen to all the talking heads and panic sell. Institutions probably love this and scoop it all up. I still stand by my decision to buy this sector fund and I have been. I’m not talking about buying a few individual stocks. It is index based and holds a large amount of companies. The fund I purchased specifically holds 397 company’s stocks. It is diversified within that sector.
km91
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Re: Why not follow Buffet’s mantra?

Post by km91 »

exodusing wrote: Fri Mar 24, 2023 12:14 pm
Is a more diversified portfolio a better portfolio? Why wouldn't the market want, and move to, a better portfolio?

Should we consider weightings by number of companies or by the economic value of the companies? Are you better than the market at evaluating economic value?

Just to be clear, the average investor is not the average person, at least not for these purposes. See my representative/average investor post above. Perhaps the marginal price setting investor is another way to look at it. Investing is a highly competitive enterprise.

Efficient is not the same as rational. Efficiency does not guarantee an accurate prices, only a price that incorporates all relevant information in the judgement of the market. If you are better at gathering information and analyzing it than the representative/average/marginal investor, then certainly go for it, you'll do very well.
I guess the question I would ask is what is the connection between price and portfolio diversity?

In my example above I am not claiming to have any sort of insight into the proper pricing of the top 500 stocks or the bottom 4000 stocks. I view 80% of cap weight in 10% of investible stocks as a risk, I am not trying to beat the market by tilting towards small, I am trying to reduce concentration risk. I take the price of VTI and VB as given and tend to believe the market price is the right price. But this doesn't have much to do with portfolio diversity
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