Advisers Ditch 'Buy and Hold' for New Tactics

This would be the Zvi Bodie strategy.

Anoop

The article says 15% of the 500 advisors they polled are significantly changing their strategy.

I'd like to know how much of it is that suddenly some folks have decided that they know how to time the markets when previously they didn't - versus how many of them suddenly realized that they and their clients are more risk-averse than they all had thought they were during the bull market.

During the bull market, nobody wanted to be at the traditional

60/40 allocation - why miss out on all that stock-market upside? Now that they've been blown out of the water with 50% losses in their equity portfolios the 22% loss last year on a dead simple 60/40 index portfolio looks pretty brilliant. But folks - both the markets and investors - always seem to behave by looking backwards. Cash and treasuries did best during the disastrous 2008, so now all those backwards-looking folks are thinking that if they position their portfolios for 2008, they'll look brilliant. If they were really brilliant, wouldn't they have made all these adjustments *before* this unpleasantness? Are they really going to know how/when to get back in?

As I said in another note recently, start with a 60/40 index-based portfolio and unless you can offer some very convincing evidence that you can improve on it - not anomalous evidence ("last year stocks stank!") - leave it alone.

How many times have we all heard "It's different this time"? And how many times has it really been different?

BWS, it is my personal opinion that changing a strategy in response to changing circumstances, is a very sensible thing to do. The question is what specific changes to make.

Myself, personally, I buy more things if they get cheaper and sell (or do not buy) when they are expensive. Hence, allocation of my capital would change with changes of prices, in some imprecise fashion. I do not consider that to be an unreasonable approach. I am approximately

85% in stocks, and 3% in junk bonds, with the rest in cash, euros or higher rated bond funds. This is dramatically different than it was a year ago, when I was approximately 35% in stocks (most of which was one stock, actually). This change is a response to changed circumstances.

As far as advisers go, they are paid by clients, so they need to have a strategy that appeals to clients. Otherwise they will not have clients.

If this is why some of them are selecting their strategies, then we need to look at clients own dispositions to see why advisers would recommend something that would appeal to those clients.

Good point.

Several years ago, I heard an opinion that, collectively, the investing public (not just individual investors, but fund managers and so on) never really learn the lessons of the past, repeat the same mistakes, and act more due to their individual temperament than due to rational thinking. At the time, I thought that it was outlandish, but the recent events made me believe in this opinion.

i

Is the author suggesting Gold is low-risk, or am I parsing the sentence incorrectly as I read it? Joe

Yes, the author wrote that gold is low risk. I would read it as the opinion of both the author as well as the cited advisor.

I do not consider gold to be a safe investment at this price.

i

Over the years I have often heard the advice: "Invest for the long term. There will always be ups and downs in the market, ....." But now I am beginning to think that such advice itself rises and falls along with the market. If it is a good idea to ride out the ups and downs without panic in times of an "up," isn't that still a good policy now that we are in the midst of a "down?"

It's very reasonable. In fact, it is one of the most subtle and least understood benefits of investing in things like the Vanguard Balanced Index being discussed in another thread. It is continually rebalanced.

Every time you rebalance a portfolio, you tend to sell things that are relatively expensive (overweighted in the portfolio) and buy things that are relatively cheap (underweighted in the portfolio). It is an automatic buy low, sell high strategy.

It's also why the efficient market hypothesis is 100% pure nonsense. People are not coldly rational. Not me, not you, not anyone. To the extent we can get more rational, we become better investors because we can start moving against the emotional crowd. But the crowd is always going to dominate the market. This provides investment opportunities for contrarians.

You might be interested in looking at behavioral economics that studies how people actually do behave. Here's a really good one page summary of some of the mistakes built into people's psyche.

-- Doug

Advice such as "buy stocks at any price" and "hold stocks at any price" and "stocks are not risky" usually does come when the market has been going up for a while.

I recently read a book "Dow 36,000", which made a case that stocks are no more risky than bonds, so a dollar of earnings should be priced the same as a dollar of treasury bill interest, so stocks should be valued to make Dow reach 36,000. What the author of the book forgot was that stocks were not as risky due to risk premium, because a relatively large earnings yield would compensate for ups and downs. A low earnings yield would not compensate the same way. So Expensive stocks are much riskier than cheap stocks.

What is true is that if you buy stocks when they are inexpensive quantitatively, you will do OK over a long enough period of time. Your gains come to you due to earnings that your investee companies earn, so if you get a lot of earnings per dollar invested, you will make money.

i

and also:

Put another way, EMH does not require a stock's price to reflect a company's future performance, just the best possible estimate or forecast of future performance that can be made with publicly available information. That estimate may still be grossly wrong without violating EMH.

So you can't look at the gyrations and booms and busts and say "people are irrational -- the EMH is bunk." You have to look at whether or not there are more market-beaters *than chance would predict*.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

Let's go back to Fatma's original thesis:

"An 'efficient' market is defined as a market where there are large numbers of rational, profit-maximizers..."

Eugene F. Fama, "Random Walks in Stock Market Prices," Financial Analysts Journal, September/October 1965

This is a tail chasing definition. The market is right because it is right.

A couple more quotes from the same Wikipedia article:

"Empirical evidence has been mixed, but has generally not supported strong forms of the efficient markets hypothesis"

and

"Speculative economic bubbles are an obvious anomaly, in that the market often appears to be driven by buyers operating on irrational exuberance, who take little notice of underlying value. These bubbles are typically followed by an overreaction of frantic selling, allowing shrewd investors to buy stocks at bargain prices."

Which is what a number of the shrewd folks here are doing. Dreman in his Contrarian Investment Strategy makes a compelling argument that you can make money investing against the crowd. So does Ed Easterling in "Unexpected Returns".

I hope I haven't snipped too much of your message to maintain context, but our good moderators like things short.

-- Doug

I would swear that a count of the number of newspaper ads advising readers to invest in stocks because they do well in the long term would itself be a good index of the market. In the area where I live at least, that count would surely rise and fall along with the Dow (with perhaps a 6 month lag).

I remember seeing the "Dow 36,000 book" on bookstore shelves some time ago, but I never got around to reading it. My trouble is knowing when stocks are "inexpensive quantitatively." I have heard people claiming that to be the case when the market is near the top.

Regarding market efficiency.

I actually studied in Fama's class at U of Chicago (did not do very well in it, but did the whole class and passed). I thought that EMH was B/S, even then. It was our favorite topic for conversation among the students. By that time, I already owned some BRK/B shares.

The efficient market theory says that an investor (including or excluding insiders, depending on the version), cannot outperform a certain measure of "average market", despite doing diligent research, simulation, computer modeling, and so on.

Because it involves a negative, and is in some ways fuzzy, it is hard to disprove and is almost impossible to prove.

Fama was a very bright person and a scholar of EMH, but he never flat out said that he believed in it. He merely explored it in depth. So I would not say anything like "Fama is a fool".

Much has been written about EMH and many historical anomalies were found. With anything historical, it is very difficult to see if those historical anomalies, like low P/E investing and such, would repeat their outperformance the future.

Warren Buffett made a famous speech "The Superinvestors of Graham and Doddsville" where he very succintly debunked the EMH.

He said, roughly, that he knows rather many individual people who consistently "outperform the market" by a wide margin. That, as such, is not at all a proof that this is not a random occurrence. But how come, he asks, so many of them come from Graham's Columbia value investing class? The possibility that this is a statistical fluke, is so minuscule as to not be seriously possible.

That means to me that there are people who are able to beat the market consistently, in a manner that is impossible to occur due to pure chance.

So the question of existence of "superinvestors" is a settled one, for me. I do think that EMH has been falsified beyond doubt.

That said, a much more pertinent question is: can a not-so-gifted, average intelligence Joe Blow, like myself, not bright like Buffett or Walter Schloss, busy with work and kids, and such, outperform the market?

This is a question that I considered and decided that I should not bother answering it, and, furthermore, I should not even try to outperform the market, such as S&P 500. I only make investments that make sense to me, and even more importantly, do not make investments that do not make sense to me.

Most of my investing career since 1996, until recently, was in a very difficult and overpriced environment, but at least I have not lost money and made some. (and did better than S&P 500, which is nothing to brag about in this environment).

i

But following the latest investment fashion is not what I'd call a sensible thing to do.

So you have not change strategy, which is the sensible thing to do.

But clients hire advisors to get professional management. This is not the fashion industry. Think of this as similar to the medical profession. Would I trust a doctor who changes medical strategy because he wants to keep his patients?

Suggested edit to title:

"Reporters Ditch 'Buy and Hold' in Search of New Articles"

-Tad

The best indicator of a market top that I know, I have seen in the _Intelligent Investor_ book. The indicator is a large number of obviously bogus IPOs.

They become inexpensive below P/E of 15, the lower the better. There is no hard and fast number, but 15 seems to be a reasonable, but not precise, boundary.

i

Buy and hold is the basis for investing. If a company is making money and retaining it, their stock should increase in value. Intelligent investors won't hold stock in a company that is persistently losing equity.

-- Ron

Exactly. I'd be very concerned about an advisor who is changing with the wind.

It's always been "hypothesis" to me. The reason is that it is a concept; a broad generalization; a comment on the nature of economies. If one tries to take it literally, then of course holes will be poked in it.

All EMH means to me is that it is difficult to beat the market when buyers and sellers are operating with essentially the same information.

So I do not understand your protests to EMH. Is it that you want to argue that a value investing strategy beats investing in the market as a whole? If so, over what time period? In other words, if a value investing strategy does not always beat the market as a whole over all time periods, then I guess value investing is not necessarily the way to go, either.

Both EMH and value investing make broad comments about the nature of markets. Both have their uses.

Warren Buffett was fooled like everyone else when he plowed money into a certain bank (and other financials?) a little before last year's crash. He is generally a careful person, and generally worth listening to, but I am not convinced he is the prophet nor even financial scholar so many paint him as. His decisions on behalf of Berkshire Hathaway deserve as much scrutiny as the advice of Scott Burns, Jim Cramer, Suze Orman, Jeremey Siegel, and so on. Buffett is not above the fray. I advise not giving him too much deference.

Otherwise, applause for Richard's post.

No, EMH states that it is impossible for anyone (besides, perhaps, corporate insiders) to beat the market, not merely difficult for most people.

``The efficient-market hypothesis states that it is impossible to consistently outperform the market by using any information that the market already knows, except through luck.''

I posted a link to a PDF file that shows several people, most associated with Ben Graham, who beat the market rather consistently. I recommend reading it, as it is well written.

However, none of what I said suggests that anyone can beat the market with any kind of a recipe. But the article shows convincingly that some bright people, who share a common background and approach, could do so in a manner that would not be possible randomly.

Most people probably cannot beat the market consistently. But EMH states that no one can.

There are two meanings of value investing. One is buying stocks with low P/E or low price to book ratio. It is comparatively easy and is described as "stock screen".

Another approach is understanding how businesses operate and finding ones that are more valuable than they are priced. The first approach is easy and the second is very difficult. Essentially, you would need to have a business insight better than that of other, sophisticated, people, analyze competition, and things like that.

While doing so is very hard, it is not impossible, as EMH claims.

Buffett does not give stock advice.

Last year S&P 500 lost 37%. Berkshire Hathaway lost 9.6%. Big difference. That amounts to 27.4% outperformance.

i