Notes
Updated: November 29, 2005.
Gummy Slices
I read a most remarkable series of mathematical theorems today [November 26, 2005]. They asserted that the (capitalization weighted) Total Stock Market index is the optimal stock portfolio if any one of the following assertions is true:
1) The Efficient Market Hypothesis (as defined by the writer),
2) The Capital Assets Pricing Model CAPM or
3) The Fama-French three factor model.
In addition, if any one of those assertions is false, then the Total Stock Market index is not optimal. This, in turn, means than NONE of the assertions is true.
I have been aware of holes in each of the assertions, the most convincing evidence having been supplied by David Dreman. The counter-arguments have been extremely weak: such as an endless supply of new definitions of what is meant by the Efficient Market Hypothesis and the repeatedly disproved assertion that the Value Premium comes at the cost of greater risk.
The S&P500 index and the Total Stock Market index are almost identical since both use capitalization weighted. To the extent that any combination of stock market slices OTHER THAN capitalization weighting outperforms the Total Stock Market (or, approximately, the S&P500 index), the three leading academic theories must fall. Our observations in Gummy Slices add to a growing body of evidence: OTHER combinations are BETTER.
Strictly speaking, our conclusions apply to the distribution phase and Safe Withdrawal Rates. During this phase, all of the rebalanced portfolios had the same amount of scatter.
Gummy Slices
More Gummy Slices
I have continued looking at what our data have to tell us.
Here are some findings with new data. These findings apply during accumulation (with dividends reinvested but without any other deposits and/or withdrawals).
The amount of scatter differs substantially among the different portfolios.
More Gummy Slices
More Gummy Slices Addendum
More Gummy Slices Addendum Two
Valuation-Informed Indexing
Rob Bennett posted this article today. It is outstanding. I endorse it fully, without reservation.
What Is Valuation-Informed Indexing?
News Alert: Explosive Article in this month's FPA Journal
Read the following article from the October 2005 FPA Journal. It is exceedingly well done. It is revolutionary. It turns everything upside down. Best of all: it makes sense.
Passive Investing: The Emperor Exposed by Christopher Carosa, CTFA.
Passive Investing: The Emperor Exposed
There are enough subtle details in the article to give it credibility. For example, the article includes supplemental information on standard deviations and overall annualized returns even though data reduction forced the use of averages.
Keep in mind that there are lots and lots of data points related to mutual funds that encourage misleading interpretations. Most of the meaningful data are limited to the last three decades.
The critical difference between this study and others is its use of asset weighting. This study looks at how well investors have invested their money. Other studies have treated all mutual funds equally, whether managing $10 million or $10 billion.
Keep in mind that actively managed mutual funds invest in markets other than stocks. Very few are fully invested in stocks at all times. Mutual funds vary allocations. This can add to performance when done properly and carefully. It can detract seriously from performance when done recklessly.
This article tells us how well investors select their funds. This article does NOT tell us how well they choose WHEN to invest. Too many investors get excited. They buy too much when the market is too high. Too many investors buy high, get discouraged and end up selling low.
For additional comments, read this.
FPA Journal's Explosive Article
Calculator Results Using Gummy's Database
In my May 2005 Highlights post, I wrote:
"14. We have found that P/E10, which is calculated on the S&P500 index as a whole, also works very well for the Large Capitalization Growth, Small Capitalization Growth, Large Capitalization Value and Small Capitalization Value slices as well. You do not need a separate indicator."
Read May 2005 Highlights and these new articles from the Edited Posts Section. I have placed both Edited and Unedited Versions into that section.
May 2005 Highlights
Summary: Switching with S&P500 Slices
Edited: Switching Allocations with Large Cap Value
Edited: Large Cap Growth and Switching
Edited: Switching Allocations with Small Cap Value
Edited: Small Cap Growth and Switching
Edited: S&P500 and Government Long Bonds (Revised)
Edited: Sanity Check with the S&P500
Gummy Slices
Two Posts Worth Reading Right Away
Here are two posts that you should read right away. More Than A Number helps you know what our research is all about. We provide meaningful insights. Our Roots tells you about our background and what we seek to accomplish.
More Than a Number
Our Roots
Guidelines Section
Check out my Guidelines section. I have added many new posts.
My Guidelines are NOT elementary. They will NOT insult your intelligence. They cover important points that are often left unstated or overlooked.
Browse around
I do not put everything into the New Post section. Browse around.
If You Don’t Want to Wait
I have added a series of posts for those who wish to retire in the future. This is upbeat.
I start by looking at buy-and-hold in today's market. I show what to expect. The outlook is gloomy. But I do not stop there.
I point out how you can take advantage of what is likely to happen in the next decade. This is a little optimistic and it is not guaranteed. But it is reasonable and realistic. [If I am wrong, the most likely difference is that it might take one or two years longer.]
I top this series off with some very good news for people who want to retire SOON.
You Can’t Count on 7%
You Can’t Count on 7%: Application
You Can’t Count on 7%: Dollars
Since You Can’t Count on 7%
I Don’t Want to Wait
I Don’t Want to Wait, But..
Earlier Notes
Here are our earlier Notes.
Notes through August 21, 2005
Remember Demographics
It is a good idea to keep demographics in mind whenever you look at the economy and investments.
Remember Demographics
Buy-and-Hold Investing
Rob Bennett's latest Letter to the Editor opens up a new area of research. Read his letter and my initial response.
Rob Bennett's Letter about Buy-and-Hold Investing
Buy-and-Hold Projections
Buy-and-Hold Dollar Projections
Valuations and Dividend-Based Strategies
Dividends and True Buy-and-Hold Investing
Gradually Increasing Bond Allocations
I have posted edited versions of my articles about Gradually Increasing Bond Allocations.
Very Heavily Edited: Gradually Increasing Bond Allocations: Returns
Edited: Gradually Increasing Bond Allocations: Returns Addendum
Edited: Gradually Increasing Bond Allocations: HSWR
S&P500 Returns Update
I have added tables with 40, 50 and 60-year returns. I have added tables for presenting S&P500 Statistics. I have determined the 20, 30 and 40-year regression equations of S&P500 Returns versus valuations.
S&P500 Returns
S&P500 Returns Statistics
S&P500 Regression Equations
S&P500 FIRST YEAR within a DECADE with returns above 7%, 6%, 5% and 4%
S&P500 Dividend Yields
Graphs
I have finally learned how to put graphs into my Yahoo briefcase along with my SWR Calculators. I posted the first one today (October 14, 2005). More will follow.
Yahoo Briefcase
The Latest in Current Research
Inspired by a letter from Mike, I have built a new calculator and opened up a new area of Current Research: Expanded Switching Algorithms.
Current Research: Expanded Switching Algorithms
A Note about Statistics
For the details behind my statistical approximations, I refer you to the NoFeeBoards SWR Research Group archives. You can access them in my Yahoo Briefcase. I have made them available to the General Public.
They are not easy to use.
An easier route is to read a tutorial that Gummy (retired Professor Peter Ponzo) and I put together.
Rest assured that, when I do things such as use of eyeball estimates, it is because of the volume of my research. It is not because of a lack of understanding of the underlying statistics.
Gummy's Tutorial (JWR Stuff)
Gummy's (Peter Ponzo's) Web Site
Yahoo Briefcase