Before Bogle: How much could the ordinary investor have got?

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cs412a
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Re: Before Bogle: How much could the ordinary investor have got?

Post by cs412a »

jeffyscott wrote: Tue Jun 06, 2023 8:13 amI would think that high expenses and other barriers to small investors could have affected returns by keeping them out of the stock market entirely. I don't think it was very common for the average, modest income, person to invest in stocks in the 1950s, 60s, or even 70s. Like Nisiprius, I think that only started to change when the 401K was invented (apparently about 1978). Maybe my view is distorted, due to having been raised in a poor, single-parent household in the 1960s and 70s, but I don't think personal saving for retirement was much of a thing, even for those, like my mom, who had no pension.

Besides expenses and other costs, another big difference is that someone who actually was saving for retirement in those past times would only have been able to do so in a taxable account. These days, not only can one invest with near 0 expenses, much of that can be done with no tax drag on the returns.
Both of my grandmothers lived through - and invested during - the Great Depression of the 1930s.

My dad's mom, a single female head of household, invested in government bonds. She eventually inherited my great-grandmother's house, so she also had home equity. Her SS benefits, bonds and the sale of her home in the latter part of the 20th century funded her retirement and ultimately a 10-year stay in a nursing home (from her mid-80s to her mid-90s). She was only on medicaid the last year or so.

My mom's dad, an immigrant, had a steady job working for his brother throughout the Depression and until he retired. However, my grandmother (whose education stopped at eighth grade) handled the money. She bought stocks during the Depression (when, as she told me, they were cheap) and was a buy-and-hold investor. My grandparents lived well in retirement although they enjoyed a simple lifestyle - they didn't travel and neither of them ever learned to drive. In their later years (89 and 94, respectively), their money was spent on nursing homes but even then there was a small inheritance for my mom.

Interesting that with that background, my parents never managed to save any money, let alone invest. Their only wealth was their home equity. Fortunately, my mom was able to live as a widow on her SS benefits.

My take-away is that while earlier generations didn't have the same options we currently do, they managed.
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Re: Before Bogle: How much could the ordinary investor have got?

Post by Alpha4 »

psteinx wrote: Wed Jun 07, 2023 8:05 pm Hmm, maybe I overestimated.

The graph here suggests pre-1975 one-way frictions (commission + half-spread) of ~1.1%:

https://www.businessinsider.com/histori ... 014-3?op=1
The following table (taken from either the Wiesenberger 1952 or 1953 yearbook IIRC) shows what the minimum allowable commissions were before the end of fixed commissions on the NYSE in 1975. In other words, as of the 1950s these were the lowest any discount broker--had such a thing existed back then which I don't believe it did--could've charged you and not risked getting kicked out of trading privileges on the NYSE for violating its rules on commission levels.

Image
Last edited by Alpha4 on Thu Jun 08, 2023 9:47 am, edited 1 time in total.
psteinx
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Re: Before Bogle: How much could the ordinary investor have got?

Post by psteinx »

McQ wrote: Wed Jun 07, 2023 11:47 pm Hello psteinx: thanks for this very thoughtful post. The paper you are looking for is by Charles Jones: https://www0.gsb.columbia.edu/mygsb/fac ... 0Costs.pdf. It has trading costs decade by decade from 1900.

...

Trading costs were not level. They were low before the Depression, and then rose to a peak in the 1960s and 1970s. So your original estimate would have been right in some decades and wrong in others.
Thanks for the link. Yeah, I think that was a/the source for the graph in the article I had posted.

Figure 4 shows total one-way costs hovering rising from around 0.9% in the late 1930s to ~1.1% to 1.2% in the early/mid 1970s. Interesting that costs ROSE even as volume was presumably increasing.

Figure 1 is also interesting - showing just the spread costs. These are on DJIA stocks, so presumably, ~30 of the biggest cap, most liquid stocks - the kind we would expect to have ~1-5 penny spreads now (probably 1 penny if priced in the $20-$30 range, as was typical in older days). Spreads are around 0.8% from ~1935-1945, falling to ~0.6% around 1985, before falling off rapidly to 0.2% in 2000. I'd guess they're around 0.05% or less, today.
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Re: Before Bogle: How much could the ordinary investor have got?

Post by psteinx »

McQ wrote: Wed Jun 07, 2023 6:16 pm No question but that academics prefer to ignore costs. It simplifies things. The justification will be that costs are hard to estimate, may vary across investors, and may not be stable over time, thus obscuring the phenomenon of interest, which is typically the return on a risk asset versus the return on a risk-free or riskless asset, or the return on risk assets under one macroeconomic circumstance rather than another, or the return on one risk asset versus another (small, large). In this context, costs are like a variable that occurs on both sides of the equals sign, hence can be removed without loss of information.

Ignoring costs leads to certain absurdities, of course. Consider a small stock trading on the NYSE near the bottom in 1932; quite a few of these were quoted at 1/8 bid, 1/4 ask, while not trading very often. No problem if you are an academic: you can always buy and sell arbitrary amounts at the midpoint of the bid-ask spread, even if the stock hasn’t traded for weeks. To paraphrase an old Mel Brooks movie, it’s good to be the professor.

In this example, an academic might record a purchase at 3/16, say 100 shares, for a cost of $18.75; next month, if the market bounced and the quote moved to 1/4 bid, 3/8 asked, you’d value the position at $31.25 (5/16), showing a 67% gain on that part of your, ahem, small value portfolio.

The actual investor would have had to pay the ask quote, opening the position at $25 + $7.50 commission, or $32.50; then had to sell at the bid, realizing $25 – $7.50, or $17.50, booking a loss of 46%. Costs matter, as Mr. Bogle used to say.
This bit above is very important in general, and especially in considering older data that appears to support a large small-value premium in the early days (ballpark, 1927-1984). Portfolios that reconstitute annually would have involved substantial costs, if much turnover was involved.

That's on top of time invested in research and execution, in the days when both were MUCH harder than today. If an investor couldn't just buy a fund that easily did this for him, he had to do it himself. For a young Warren Buffett, maybe. But unless you were he (or, perhaps, one of the handful of investors (many in/around Omaha I think) who stumbled into and trusted him early, you had to do this stuff yourself, or settle for a more mediocre fund. Has anyone yet identified a small-value fund that operated across the ~1927-1984 era and captured most of the supposedly very-high small-value premium? I don't think so, but would be interested if this did in fact happened.

But if it DIDN'T (and maybe even if it did), then one should take all of those early years of SV performance with MANY grains of salt.

And, as I think the OP of this thread showed (in a different thread), DFA, who first tried to chase the "academic" factors (small/value, early on), had less-than-stellar results. DFA Micro - the first of these funds, has been ~breakeven (before advisor fees) vs. the S&P 500 since inception. DFA large value has been kinda meh. DFA small value (DFSVX) is ahead of the game (pre advisor fees), but would have required an investor to focus on that (rather than the other DFA offerings), hold through years of mediocrity/underperformance (up until ~2000), then get a big returns from 2000-2004, but then that investor would have seen further mediocrity post-2004.

To be clear - I do a fair amount of stock picking myself, often with value-y stocks. But I think the biggest factor advocates dramatically oversell its real-world proven merits (less so now than circa 2004-2010).
Last edited by psteinx on Thu Jun 08, 2023 10:09 am, edited 1 time in total.
MarkRoulo
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Re: Before Bogle: How much could the ordinary investor have got?

Post by MarkRoulo »

McQ wrote: Wed Jun 07, 2023 11:47 pm ... snip ...
Your point about load funds is spot on. In the 1960s, an individual investor might have been able to buy 10 stocks, with commissions at 2%, and no ability to invest dividends cost-free or in fractional shares.
... snip ...
I though DRIPS (Dividend Reinvestment PlanS) addressed this? Not 100% ideally (you couldn't use the plans to re-balance between your holdings), but they did allow one to purchase fractional shares for no commission.
psteinx
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Re: Before Bogle: How much could the ordinary investor have got?

Post by psteinx »

MarkRoulo wrote: Thu Jun 08, 2023 10:06 am
McQ wrote: Wed Jun 07, 2023 11:47 pm ... snip ...
Your point about load funds is spot on. In the 1960s, an individual investor might have been able to buy 10 stocks, with commissions at 2%, and no ability to invest dividends cost-free or in fractional shares.
... snip ...
I though DRIPS (Dividend Reinvestment PlanS) addressed this? Not 100% ideally (you couldn't use the plans to re-balance between your holdings), but they did allow one to purchase fractional shares for no commission.
I think (not sure) DRIPs were far from universal across much of this era. Would be interesting to see how many of the DJIA or S&P 500 stocks offered a free DRIP program in 1950 or 1970...
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Re: Before Bogle: How much could the ordinary investor have got?

Post by MarkRoulo »

psteinx wrote: Thu Jun 08, 2023 10:10 am
MarkRoulo wrote: Thu Jun 08, 2023 10:06 am
McQ wrote: Wed Jun 07, 2023 11:47 pm ... snip ...
Your point about load funds is spot on. In the 1960s, an individual investor might have been able to buy 10 stocks, with commissions at 2%, and no ability to invest dividends cost-free or in fractional shares.
... snip ...
I though DRIPS (Dividend Reinvestment PlanS) addressed this? Not 100% ideally (you couldn't use the plans to re-balance between your holdings), but they did allow one to purchase fractional shares for no commission.
I think (not sure) DRIPs were far from universal across much of this era. Would be interesting to see how many of the DJIA or S&P 500 stocks offered a free DRIP program in 1950 or 1970...
I tried to find something resembling a list.

Best I was able to find was this: https://www.directinvesting.com/search/ ... rom=search

which provides a list of current companies offering DRIP programs, but no start dates.

Still, assuming that if Kellogg and J&J and P&G and P&G (not on the list, but they have an equivalent) have these plans now they probably (?) had them back in the 1950s when it made a lot more sense seems like an okay guess. But this is a guess. Getting start dates for these plans is proving difficult :-)

But if many/most of the DJIA stocks in the 1950s did offer this I think that would be sufficient. If you are buying at most 5-10 stocks to hold "forever" then restricting yourself to the DJIA stocks wouldn't be terrible.
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Svensk Anga
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Re: Before Bogle: How much could the ordinary investor have got?

Post by Svensk Anga »

This paper says that the first DRIP was established in 1968: https://digitalcommons.georgiasouthern. ... ontext=sbr The Evolution of Dividend Reinvestment Plans: 1968-1988
H. Kent Baker
The American University
Sue E. Meeks
The American University

There were not a lot of stocks offering DRIPs as of 1972, (see Figure 1).

The Wikipedia article on the subject ( https://en.wikipedia.org/wiki/Dividend_ ... tment_plan ) says that some plans had fees.
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Re: Before Bogle: How much could the ordinary investor have got?

Post by siamond »

McQ wrote: Wed Jun 07, 2023 6:16 pmNo question but that academics prefer to ignore costs. It simplifies things. The justification will be that costs are hard to estimate, may vary across investors, and may not be stable over time, thus obscuring the phenomenon of interest, which is typically the return on a risk asset versus the return on a risk-free or riskless asset, or the return on risk assets under one macroeconomic circumstance rather than another, or the return on one risk asset versus another (small, large). In this context, costs are like a variable that occurs on both sides of the equals sign, hence can be removed without loss of information.

Ignoring costs leads to certain absurdities, of course. [...]
When studying the past for the sake of history, your point is very well taken, ignoring costs makes no sense whatsoever. When trying to hone on an 'informed' strategy acknowledging the fact that the future is like to rhyme with the past, then I think things are very different.

Even using the expense ratios of real-like index funds of the early days is very debatable, imho. I'll quote your suggestion about Simba in the corresponding thread and answer there.
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Re: Before Bogle: How much could the ordinary investor have got?

Post by psteinx »

Investors advocating strategies more complex than just buying the market are desperate for backtested data to support their theories.

But we don't have much historical data. Data from ~1871 or ~1926 or maybe 1970-1980 onward, depending on your goal. If you're trying to prove something is better than the null case, over 10 or 20 year periods, then we just don't have many such periods to test with.

But, it's worse. There are good reasons to think that the future won't necessarily look like the past. The stock market is not a bag of marbles, with consistent odds from draw to draw (replacing the drawn marble to the bag). Rather, markets (and the economies, tax systems, etc. that drive them) have changed in many structural ways.

We want to know, "If I implement strategy X for the next 20 years, what are my likely outcomes?" But studying the 2 to 7 or so such independent 20 year periods we have historical data on, presumes that 2023 looks like 2003 or 1983 or 1963 or whatever. It doesn't. Yes, sometimes simplifying assumptions are useful to think about concepts, but don't marry them.

One such example that was talked about a lot more ~10+ years ago, but has been swept under the rug due to 21st century failures, is momentum. It seems obvious that momentum is likely to be closely tied to:
* Trading costs
* Information flow
* Number and scale of hedge funds/arbitreurs trading complex computer modelled stat arb (many now, ~zero 40+ years ago).

Data on the success of momentum strategies from 1955 or 1935 adds almost no value to what we should expect from 2023 forward. Even data from 1995 is questionable.

Momentum looked great - maybe the KING of factors, until it wasn't. IIUC, it's been a disaster from ~2000 forward.

===

So, factor advocates, if you want, use that data from 1926 onward to wax enthusiasticly about small and value. Lower your equity from 70% to 30% - it won't hurt you, you see, because you're tilted to small value, and you'll get the same return as a non-tilter who goes 70/30, right? A free lunch, or at least a free stop at the dessert tray!!!!

And, if/when it doesn't work for 5, 10 or 15 years, keep paying that well known advisor's firm ~0.5-1.0% in AUM fees* - it wasn't a bad strategy, just a bad outcome. There's no falsifying the advisor's claims, because any stretch of underperformance is just unlucky pulls from the bag of marbles. And even if the old strategy maybe wasn't quite PERFECT, well, you should see the latest! Commodities! Cat Bonds! Peer-to-Peer Lending! Lions and tigers and bears, oh my!

* Plus fund fees!
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Re: Before Bogle: How much could the ordinary investor have got?

Post by MarkRoulo »

Svensk Anga wrote: Thu Jun 08, 2023 1:03 pm This paper says that the first DRIP was established in 1968: https://digitalcommons.georgiasouthern. ... ontext=sbr The Evolution of Dividend Reinvestment Plans: 1968-1988
H. Kent Baker
The American University
Sue E. Meeks
The American University

There were not a lot of stocks offering DRIPs as of 1972, (see Figure 1).

The Wikipedia article on the subject ( https://en.wikipedia.org/wiki/Dividend_ ... tment_plan ) says that some plans had fees.
Yeah, it appears that DRIPS didn't really take off until they no longer made a lot of sense. From a Christian Science Monitor 2005 article:
Until a few years ago, not many companies offered DRIPs. But in 1995, the Securities and Exchange Commission made it easier for corporations to put direct purchase plans in place. Since then, the number of companies with DRIPs has grown to more than a thousand, including such well-known names as Aflac, Ford, Procter & Gamble, McDonald's, and Gillette.
https://www.csmonitor.com/2005/0103/p14s01-wmgn.html

So 1950s and 1960s basically no. And maybe "not really" until the mid-1990s. Sigh.
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Re: Before Bogle: How much could the ordinary investor have got?

Post by littlebird »

JEFFYSCOTT wrote:

I would think that high expenses and other barriers to small investors could have affected returns by keeping them out of the stock market entirely. I don't think it was very common for the average, modest income, person to invest in stocks in the 1950s, 60s, or even 70s. Like Nisiprius, I think that only started to change when the 401K was invented (apparently about 1978). Maybe my view is distorted, due to having been raised in a poor, single-parent household in the 1960s and 70s, but I don't think personal saving for retirement was much of a thing, even for those, like my mom, who had no pension.

Long, long before the invention of the 401k, my working class parents (an autodidact garment worker with a 10th grade education and a homemaker/part time school aide) were buying individual stocks in the 1950’s. I recall AT&T and a telephone company that eventually turned into Verizon (Rochester Telephone?). Before them, my immigrant grandparents (a housepainter/garment worker and a homemaker) were buying stocks.
Last edited by littlebird on Thu Jun 08, 2023 5:49 pm, edited 1 time in total.
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McQ
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Re: Before Bogle: How much could the ordinary investor have got?

Post by McQ »

Svensk Anga wrote: Thu Jun 08, 2023 1:03 pm This paper says that the first DRIP was established in 1968: https://digitalcommons.georgiasouthern. ... ontext=sbr The Evolution of Dividend Reinvestment Plans: 1968-1988
H. Kent Baker
The American University
Sue E. Meeks
The American University

There were not a lot of stocks offering DRIPs as of 1972, (see Figure 1).

The Wikipedia article on the subject ( https://en.wikipedia.org/wiki/Dividend_ ... tment_plan ) says that some plans had fees.
I really appreciate that information, Svensk Anga. I didn't have a good answer for Mark without it.
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psteinx
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Re: Before Bogle: How much could the ordinary investor have got?

Post by psteinx »

littlebird wrote: Thu Jun 08, 2023 5:43 pm I would think that high expenses and other barriers to small investors could have affected returns by keeping them out of the stock market entirely. I don't think it was very common for the average, modest income, person to invest in stocks in the 1950s, 60s, or even 70s. Like Nisiprius, I think that only started to change when the 401K was invented (apparently about 1978). Maybe my view is distorted, due to having been raised in a poor, single-parent household in the 1960s and 70s, but I don't think personal saving for retirement was much of a thing, even for those, like my mom, who had no pension.

Long, long before the invention of the 401k, my working class parents (an autodidact garment worker with a 10th grade education and a homemaker/part time school aide) were buying individual stocks in the 1950’s. I recall AT&T and a telephone company that eventually turned into Verizon (Rochester Telephone?). Before them, my immigrant grandparents (a housepainter/garment worker and a homemaker) were buying stocks.
People had money, some wanted to save/invest for the future.

Holding significant gold was banned after 1933 (I think that's the right year).

While bonds and other fixed rate stuff did pretty during the depression, there was, I think, strong government pressure to repress interest rates that began during WW2 (you were unpatriotic if you didn't buy government bonds), even as inflation took off during/after the war (no gold standard anymore to save you!)

Bond holders got creamed. Stock holders did pretty well.

Pension funds were likely smaller, and were I think discouraged from buying stocks. Individual investors had less accumulated wealth than they did now and few/no tax deferred/free investment vehicles. Still, it was individual investors buying most of the stocks. Probably not so much someone at the 30th income percentile, but at the 70th/80th/90th/95th/99th? Sure.

High transaction costs, on both individual stock buys and mutual fund buys, weren't great, but it was the only game in town. Today, stock trading is ~free, but house buying involves ~5%* round-trip commissions. And yet, people still buy houses, and move from their existing house to a new house.

* Probably more if you include other costs and fees, including those involved in getting a mortgage.
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Re: Before Bogle: How much could the ordinary investor have got?

Post by seajay »

psteinx wrote: Thu Jun 08, 2023 5:52 pm Holding significant gold was banned after 1933 (I think that's the right year)
In September 1931 the British Parliament passed a law (hastily) to have banks only return paper Pound Notes when money was withdrawn, where previously you could draw your money either in pound notes paper money or as a gold coin (one Pound gold sovereigns worth their weight in gold). Money was gold (Sovereigns), where paper notes were previously directly convertible to/from gold coins currency. Basically the treasury were running low on gold, too many were importing paper money, converting it to gold and removing the gold from the country such that that flow had to be stopped.

In 1933 the US passed a Executive order that in effect nationalised all gold, compulsory purchased it (money) and likewise transitioned the population away from using metallic value coins/currency (gold) over to paper currency, and the nationalised gold was locked up in Fort Knox.

Silver coins were continued as currency (silver shillings/silver dollars) however, but progressively devalued (coins not worth their weight of silver). Nowadays metallic coins tend to be inexpensive to manufacture, nothing like their worth-their-weight metallic value. Copper prices spiked some years back and formerly copper pennies were changed to predominately be manufactured using inexpensive/common metals.

After WW2 and the US secured international agreement to adopt the US dollars as the primary reserve/trade currency, where prior to 1930 that was gold/Pounds, on the basis that the US dollar would peg to gold. Which held for decades, but where the US repeatedly re-set that.

Savers prior to the 1930's would be inclined to just hold bonds/cash (gold). Deposit gold coins for safe keeping and interest, and where inflation broadly tended to average 0% (finite gold) such that the interest was a real rate of return. Across the 1900's and into the 2000's prior broad 0% inflation and a real return from bonds (gold) changed to predominately being inflation only, decline of the purchase power of paper money. A large chunk of the global population are now looking to break away from using the US dollar for international trade, TINA (there is no alternative (to the US dollar)) is seeing a rise of TARA (there are reasonable alternatives). Russia, China, India, S America, Africa, Arabia etc. are in a current transition to such alternative(s), and where collectively that body represents over two-thirds of the global population. Such that where previously the US could sanction (international trade transactions clearance traversing through the US - that could be blocked) others, but under TARA such sanctioning wont be possible. It will also mean that the US can't simply export inflation, print $1Tn to perhaps increase the military, and will lose a competitive advantage, have to be more accountable for its spending.

Investment wise and prior pre 1930's holding money (gold) deposited and earning interest (bonds) was generally good-enough. Thereafter and stocks that were previously seen as only being for speculators became the more normal asset. Helped by the Roaring 1920's when even shoe shine boys started buying stocks and where they made many rich overnight, until that bubble burst (1930's Wall Street Crash).

Bonds became more of a 0% real expectancy. Previously crowns/states paid real rates of return in order to borrow gold (money). After gold/paper notes were disconnected the crown/state no longer needed to borrow gold, instead paper money could just be printed/spent. Nowadays that 0% broad return on bonds/gold arises out of inflation and taxation drag factors.

Generally states are greedy, tend to find ever new ways to tax more. Are great at spending other-peoples-money. Where previously savers could save and get real rates of returns even just from gold/bonds, so that was negated, leaving just more speculative stocks as the only real rate of return assets. So back-testing should really look at bonds pre 1930's, stocks since the 1930's, and with it in mind that states might find ways to tax stocks to levels where even they risk averaging 0% real returns. By lowering SWR to 3.33% you're better prepared IMO. 30 year return of your inflation adjusted money via yearly instalments. With individual variability around that - that's more a case of good/bad individualistic luck. if you assume each/all assets tending to broadly average 0% real total returns, but individually are volatile, then a reasonable approach is to diversify across multiple assets, as when one has swung-low (failed to match inflation) another will tend to have swung-high (beat inflation). and where the gains in the better performer offset and more then bad case (-25% lag requires a +33.33% recovery to get back to break even, geometric 0%, simple average +4.15%). Diversification is a means to capture some of that arithmetic benefit whereas single assets just reward the geometric.

General rewards have always tended to arise out of a lower left-tail, taller right-tail combination. Single assets might transition through -25%, +33% alternations (simple model) where diversification captures a positive overall real compared to 0% real for a compounded single asset alone. That's fractal, applies at the small scale/short time period, and large scale/time. And will continue to persist, the only way for that to end is if volatility disappeared. Hence the likes of the Permanent Portfolio, Golden Butterfly ... type asset allocation choices, equal weight four of five different assets, a inclined expectancy that each year one of those will do well, another poorly, but where the overall average is positive and where you can't reliably predict which will be the best or worst asset(s).
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Re: Before Bogle: How much could the ordinary investor have got?

Post by Geologist »

At least a couple of posters have said that pension plans (meaning defined benefit plans) weren’t invested in stocks. I don’t think this was true at least in the post-WWII period:

According to Peter Drucker’s (the management consultant) 1976 book The Unseen Revolution: How Pension Fund Socialism Came to America, in 1950, there were 2000 employee pension funds and most probably were not invested in stocks (although some may have been invested in just the stock of the employer). However, General Motors started its pension fund that year and invested in diverse equities. Within one year, 8000 similar plans had been started. By 1975, there were 50,000 employee pension funds and nearly all followed the GM model. These owned 30% of the stock market value of listed companies. That’s a substantial equity investment by pension plans.

(I’m taking no stand on whether this constituted “socialism” and contemporaneous reviewers of the book that I can access on the web didn’t all agree.)

The relevance of this to what the individual investor could have received from the market is another matter.
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Re: Before Bogle: How much could the ordinary investor have got?

Post by tetractys »

Before Bogle investors were much better off gathering a portfolio of blue chip stocks and holding them for life. Mutual funds were quite poor back then, and even during much of John Bogles time.
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Re: Before Bogle: How much could the ordinary investor have got?

Post by Grt2bOutdoors »

McQ - thank you for writing this paper, excellent reading as are your other publications.
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McQ
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Re: Before Bogle: How much could the ordinary investor have got?

Post by McQ »

Geologist wrote: Fri Jun 09, 2023 1:06 pm At least a couple of posters have said that pension plans (meaning defined benefit plans) weren’t invested in stocks. I don’t think this was true at least in the post-WWII period:

According to Peter Drucker’s (the management consultant) 1976 book The Unseen Revolution: How Pension Fund Socialism Came to America, in 1950, there were 2000 employee pension funds and most probably were not invested in stocks (although some may have been invested in just the stock of the employer). However, General Motors started its pension fund that year and invested in diverse equities. Within one year, 8000 similar plans had been started. By 1975, there were 50,000 employee pension funds and nearly all followed the GM model. These owned 30% of the stock market value of listed companies. That’s a substantial equity investment by pension plans.

(I’m taking no stand on whether this constituted “socialism” and contemporaneous reviewers of the book that I can access on the web didn’t all agree.)

The relevance of this to what the individual investor could have received from the market is another matter.
The history of TIAA CREF by Greenough is roughly supportive of your point and fine-tunes the dating a bit. CREF dates to 1952 and was introduced specifically to address the fact that historically, pensions, including the TIAA defined contribution version, had been entirely invested in bonds. We forget today, but the surge in inflation after WW II ended dwarfs what we just experienced in 2021 and 2022. Simultaneously, the great bond bull market that began in 1921 was peaking; long treasury yields fell to levels not seen again until 2020.

TIAA made a well-researched and considered decision that retirement funds needed to allow for some allocation to equities if inflation was to be addressed (details in the Greenough book). CREF introduction would have been influential on other pension plans as well.

And since the great post-war bull market in stocks began in 1949, the timing was doubly propitious.
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Re: Before Bogle: How much could the ordinary investor have got?

Post by McQ »

Grt2bOutdoors wrote: Fri Jun 09, 2023 4:44 pm McQ - thank you for writing this paper, excellent reading as are your other publications.
You are too kind, Grt2bOutdoors. :D Good time for me to remind everyone of how much I gain from being able to post early drafts & snippets here at Bogleheads. Two years and counting, it's been great.
You can take the academic out of the classroom by retirement, but you can't ever take the classroom out of his tone, style, and manner of approach.
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McQ
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Re: Before Bogle: How much could the ordinary investor have got?

Post by McQ »

Here is some more information from the paper https://papers.ssrn.com/sol3/papers.cfm ... id=4457203

How the new stock fund index performed:

Image

-The fund index falls further and further behind over time under the drag of expenses and trading costs.

-S&P outperformance relative to the total market was greatest during the S&P 90 period prior to 1957. After the advent of the S&P 500, S&P outperformance is cyclic (topic for a future thread).

Minor takeaway from the research: The S&P index, historically used to evaluate mutual fund performance by Bogle and by academics, is a tougher standard than the market as a whole, as measured by CRSP. The fund index had a 158 bp shortfall over the 61 years relative to the S&P, but only 120 bp relative to the market.

Next, the intermediate Treasury index reported in the SBBI and used by Bengen is quite unrealistic (and, BTW, would today be described as a short Treasury index). There were no 5-year bonds available to the SBBI compilers before 1934; yield curve interpolation was used in the SBBI. Afterwards, a bond was bought and sold every year more or less, incurring a round-trip bid-ask spread every year; but the SBBI is an academic publication, so, as mentioned upthread, they always buy and sell at the midpoint of the spread, without cost.

And of course, no small investor would have rebalanced into their stock fund, because of the load, or back into Treasuries, because of the $1000 unit price on these notes in the days before TD. Any rebalanced result, as with Bengen, is suspect.

Given the problems with the SBBI intermediate Treasury, I prepared an alternative bond fund index that didn’t work out too well (and didn't start until December 1935), and a new savings deposit index, which gives a realistic sense of what a small investor could have got, in terms of interest. Like mutual funds, these typically had no exit fee, so annual withdrawals could be made.

I also prepared a with-cost version of the IT index. Excepting the bond fund, all these fixed income measures produced similar returns, reminding us all that the primary source of return (and risk) in any balanced mix is the stock portion.

Image

Next up: I looked at some blends of the new stock fund index and the new savings deposit index to test more and less aggressive balanced mixes. More charts to come.
You can take the academic out of the classroom by retirement, but you can't ever take the classroom out of his tone, style, and manner of approach.
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Charles Joseph
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Re: Before Bogle: How much could the ordinary investor have got?

Post by Charles Joseph »

Much less.
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
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Re: Before Bogle: How much could the ordinary investor have got?

Post by nedsaid »

McQ wrote: Sat Jun 10, 2023 2:16 pm
Grt2bOutdoors wrote: Fri Jun 09, 2023 4:44 pm McQ - thank you for writing this paper, excellent reading as are your other publications.
You are too kind, Grt2bOutdoors. :D Good time for me to remind everyone of how much I gain from being able to post early drafts & snippets here at Bogleheads. Two years and counting, it's been great.
This is what I tried to tell Larry Swedroe. Sometimes he would post something and the post would just get thrashed and he didn't always appreciate it. It was an opportunity to test his ideas against what could be a pretty tough crowd so that when he put those ideas into an article or a book, they were greatly polished.

The back and forth is how we learn, particularly for those of us who are amateur investors.

I do enjoy Professor McQ's threads and have learned from them.
A fool and his money are good for business.
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McQ
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Re: Before Bogle: How much could the ordinary investor have got?

Post by McQ »

nedsaid wrote: Tue Jun 13, 2023 9:33 am
McQ wrote: Sat Jun 10, 2023 2:16 pm
Grt2bOutdoors wrote: Fri Jun 09, 2023 4:44 pm McQ - thank you for writing this paper, excellent reading as are your other publications.
You are too kind, Grt2bOutdoors. :D Good time for me to remind everyone of how much I gain from being able to post early drafts & snippets here at Bogleheads. Two years and counting, it's been great.
This is what I tried to tell Larry Swedroe. Sometimes he would post something and the post would just get thrashed and he didn't always appreciate it. It was an opportunity to test his ideas against what could be a pretty tough crowd so that when he put those ideas into an article or a book, they were greatly polished.

The back and forth is how we learn, particularly for those of us who are amateur investors.

I do enjoy Professor McQ's threads and have learned from them.
I'm going to doubly agree with you, Nedsaid:

1. Indeed, BH can be a rough audience. It's no country for the thin skinned. I maintain a file of "posts written but not sent," i.e., defensive missives best kept from the light of day.

2. But that is a big chunk of the value of posting here, for those of us authors who do have a thick skin. Lots of learning to be had from the criticism.
You can take the academic out of the classroom by retirement, but you can't ever take the classroom out of his tone, style, and manner of approach.
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nedsaid
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Re: Before Bogle: How much could the ordinary investor have got?

Post by nedsaid »

McQ wrote: Wed Jun 14, 2023 12:27 am
nedsaid wrote: Tue Jun 13, 2023 9:33 am
McQ wrote: Sat Jun 10, 2023 2:16 pm
Grt2bOutdoors wrote: Fri Jun 09, 2023 4:44 pm McQ - thank you for writing this paper, excellent reading as are your other publications.
You are too kind, Grt2bOutdoors. :D Good time for me to remind everyone of how much I gain from being able to post early drafts & snippets here at Bogleheads. Two years and counting, it's been great.
This is what I tried to tell Larry Swedroe. Sometimes he would post something and the post would just get thrashed and he didn't always appreciate it. It was an opportunity to test his ideas against what could be a pretty tough crowd so that when he put those ideas into an article or a book, they were greatly polished.

The back and forth is how we learn, particularly for those of us who are amateur investors.

I do enjoy Professor McQ's threads and have learned from them.
I'm going to doubly agree with you, Nedsaid:

1. Indeed, BH can be a rough audience. It's no country for the thin skinned. I maintain a file of "posts written but not sent," i.e., defensive missives best kept from the light of day.

2. But that is a big chunk of the value of posting here, for those of us authors who do have a thick skin. Lots of learning to be had from the criticism.
Yes, if you can dodge the rotten fruit, the forum is pretty good. :wink: Dr. McQ has a very good bedside manner and as a result the medicine seems to go down pretty easy. Much better than trying to swallow horse pills. Thus you have encountered many fewer grouchy patients.
A fool and his money are good for business.
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