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Weekend reading: Quoting the legends

Weekend reading

Good reads from around the Web.

Even a decade ago, it was rare to hear a peep from future Nobel prize winning economists like Robert Shiller or under-the-radar investing legends like Jack Bogle.

Sure, they spoke. If you went to a bar with Bogle, I’m sure he held forth.

Shiller even wrote a famous book.

But most of the time, investing and finance was not mainstream media material, and wonky passive-style commentary was rare indeed.

I have a friend who thinks the world is now obsessed with the markets. He’s one of my lefty friends who runs a business and yet hated Thatcher.

But I do wonder if on this he has a point.

Perhaps it’s a legacy of the financial crisis or the ongoing Eurozone crisis, but the market does seem to make the front pages more often these days.

Or maybe it’s just that with so much online media around, there’s more opportunity for the obscurer titans of finance to sound off, and for us to read it?

Just this week, for example, I read interviews with Shiller and Bogle. Both featured notable quotes.

First this rather strange utterance from Shiller via Bloomberg:

“You can’t free yourself from the prison of the zeitgeist unless you become a smart beta person and start mechanically doing investments that don’t sound right.”

Er, sure thing prof. (I think he means buy a few cheap and scary-looking Greek and Russian equities).

Meanwhile 85-year old John Bogle offered this typically feisty quote in an interview with Institutional Investor:

“Smart beta is stupid; there’s no such thing. It’s an idiotic phrase. Quoting Shakespeare, I guess: It’s a tale told by an idiot, full of sound and fury, signifying nothing.

It’s just another way of saying, “I know I’m going to be above average.”

Active managers are just trying to come back and say there is a better way to index, when they know damn well there isn’t a better way.”

Gosh us investing nerds will miss him when he’s gone.

Keep making up for lost time, John!

Note: Today is the self-assessment tax return deadline. You have until midnight to submit your return online.

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: Mortgage rates continue to fall, with HSBC now touting a two-year fix charging just 1.19%, notes ThisIsMoney. You’ll need a 40% deposit and there’s a big fee, so do your sums. (When I asked if you could afford NOT to have a big mortgage a couple of years ago, I had no inkling they’d get this cheap!)

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

  • How passive funds changed investing [Search result]FT
  • Interview with Research Affiliates’ Rob Arnott – ETF.com
  • Passive is even more prudent in inefficient markets – Morningstar
  • Ritholz: My four beefs with Bogle – Bloomberg
  • New iShares ETF tracks lower volatility US REIT index – ThisIsMoney

Active investing

  • Jim Slater: Two more growth picks on AIM – Telegraph
  • Negative yields are everywhere [Search result]FT
  • Sticking with shares as Draghi finally delivers [Search result]FT
  • Crispin Odey predicts once-a-century recession – Management Today

Other stuff worth reading

  • Solar firm that sold 6.5%-paying mini-bonds goes bust – Guardian
  • Where to buy property with the strong pound – Telegraph
  • Housel: 12 interesting things I’ve learned recently – Motley Fool US
  • Want to convert a surplus pub into a home? – ThisIsMoney

Book of the week: If you’re curious to know more about the wildcatters in the US shale industry who made a fortune in recent years – only to crash the oil price and perhaps their own businesses – then The Frackers is one of the more exciting books to tell the tale. Though with more US rigs mothballed every day with oil below $50, the latest chapter is still to be written…

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  1. Note some FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. []

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{ 26 comments… add one }
  • 1 Rob January 31, 2015, 2:46 pm

    Let’s not credit Bogle with insight he didn’t have when he started Vanguard. Then he was just an ordinary fund manager that lost a corporate battle and ended up with nothing but a fund administration business. Given the state of corporate accounts then the only meaningful he could simply and cheaply run a fund was to weight by Market capitalisation. So he used that and it has become the default.
    He didn’t conduct back tests to see if revenue, or profits, or book value or dividends gave better results.
    What other assets do we buy on price as we do in mkt cap index funds?
    None. No one goes to the supermarket and says apples have gone up in price this week so I will buy more of those than I did last week.

  • 2 LadsDad January 31, 2015, 2:50 pm

    Long-time reader, first time poster. Just wanted to stop by to mention how grateful I am that you take the time to write such insightful and informative blogs. The recent additions of Grey Beard and some of the slightly off-piste topics continue to provoke thoughts a plenty.

    I’ve always treated money matters with respect, but what I’ve learnt from this blog has empowered me to be much more proactive.

    Keep up the stellar work!

  • 3 Paul W January 31, 2015, 4:39 pm

    @Rob
    Actually the next week that someone would buy the same of apples…

    Suppose the supermarket is divided equally between apples and oranges, £2 a piece each. With £4 to spend you buy a piece of each. The next week apples have gone up in price and are £3, oranges have gone down and are £1 (no change in the total value of the market). The same money still buys you a piece of each.

    Only the increase of your investment bigger than the increase in the capitalisation of the supermarket would buy you more apples. But then again you would buy more of oranges as well.

  • 4 Grand January 31, 2015, 4:39 pm

    Given i’ve only been at this a year and reading this website for around 2 and a half years. Just what was the investing landscape like 10 years ago? How much easier/difficult was it to be a passive investor?

    Grand

  • 5 The Investor January 31, 2015, 5:45 pm

    @Rob — I don’t entirely agree with your version of history, but anyway seeing as the results beat 90%+ of active funds and likely most factor-based investing on risk-adjusted basis, as best I can tell from the evidence (which admittedly is too short a run for now, both ways — the factors may yet evaporate, after all 🙂 ) I think that’s a greater contribution by far then most will ever add to the business of investing.

    I appreciate that as you run a Smart Beta fund you may have a different view. I don’t think he meant his Shakespeare quote personally. 😉

  • 6 The Investor January 31, 2015, 5:50 pm

    @LadsDad — Cheers, encouragement is always much appreciated!

    @Paul W — Exactly. Also, trackers buy and hold, in terms of exposure, except on index entries and exits. They don’t chase assets higher. They follow assets higher (and lower).

    Besides it’s a straw man argument IMHO. What matters is the results.

    If going to the supermarket and buying the more expensive produce somehow cut my shopping bill overall for some mysterious reason (to stretch the cheap passive versus expensive active metaphor) then I’d do it. I’d end up with more produce / more money.

  • 7 The Investor January 31, 2015, 5:58 pm

    @Paul W — Just to add (I am on the phone, in a queue at M&S!) that to be fair your exposure to apples would have increased. Like buying one house in London versus one house in Newcastle in 1975, versus their relative prices. So today you’d have more exposure to London property. Of course the market would have rightly predicted London property was going to be worth more (to-date) which is likely why indices work too.

    @Grand — Have to run, but just quickly I’d say passive stuff (though it was never called that in the UK, that was still a US term) was around but you had to dig for it more. The original Motley Fool UK put a big emphasis on index funds as the core of your portfolio, for example. But I don’t remember reading much if anything in the mainstream media.

    The products were around, but they were far more expensive that the US equivalents, even as recently as 2010. (Our first remixes of the US lazy passive portfolios reflected this, and also the unavailability of some products altogether).

    Back in 2008/9/10/11 I would regularly get people emailing/commenting to say “at last, someone in the UK is talking about index investing!” That seems to have died down now, I think because it’s got so much more accepted and is now covered by the newspapers etc. (Sadly for our little niche! Are we winning the battle, losing the war, from a publishing point of view? 🙂 )

    I genuinely think The Accumulator has played a large part in bringing the term “passive” over to the UK. Stacks of journalists and financial sorts read Monevator, and I think many picked the term up from here.

  • 8 Rob January 31, 2015, 9:28 pm

    The point about the “apple bubble” and passives in general is that if the weight of money is sufficiently large it will keep the momentum going and push assets higher and higher.

    Price increases are usually gradual, but corrections are very often sharp and severe. At some point shoppers will realise they can get a lot more value by buying oranges than they can from buying apples. And that is just when the shop has ordered more apples because of the rising demand. The consequence is always messy.

  • 9 The Investor February 1, 2015, 2:32 am

    @Rob — I agree sometimes that will happen, but equally sometimes the weight of money will be bidding up a Microsoft, which traded on a P/E north of 30 or more for two decades and much of the smart money thought it was too expensive / a fad / a bubble, and it made a lot of people rich before it was finally over-bid. You have to take the smooth with the rough. 🙂

    I’d argue too that it’s not passive money that is over-bidding, it’s active money. Active money is setting the price (by actively buying/selling) and passive is just following. I won’t say passive market cap money makes no difference, I’m sure it does at the margin, but by definition it’s not setting prices.

    If you’re saying that active money gets carried away bidding for apples and passive follows dumbly, I think that is fair enough, but as Bogle says to say you can do better is itself to advocate an active strategy. I’m not saying that’s wrong, or that trying to avoid these situations is the wrong strategy (or the right one) but I do think that it’s not a refutation of market cap based investing, any more than Woodford saying he can do better with his judgement is a refutation. It may be true but it’s going to be a rare exception if sustained over the long-term.

    Caveat: I’ve been out dancing all night and my ears are ringing and I’ve had a few drinks. So you may well be right whereas I’m incoherent. Will find out tomorrow. 🙂

    All the best.

  • 10 Gregory February 1, 2015, 10:51 am
  • 11 Rob February 1, 2015, 11:15 am

    My issue is more about definitions. Bogle decided that the price, I.e. Share price X no shares was the only true measure of the Market. I am saying that at the time that was a convenient short cut.
    There is however no reason why other measures cannot be used to quantify a portfolio. For cars we use mpg, top speed for houses we use size or no of bedrooms and so on. Price is something we consider after evaluating what we want.
    Why should buying shares be different? Do we want revenue, book value or something else?
    Bogle has hijacked mkt cap as the Standard measure of a company despite voluminous evidence from history that it is flawed. Sure other measures are flawed too but that does not mean they are any less worth of the label of “passive”.

  • 12 The Investor February 1, 2015, 11:41 am

    @Rob — There’s not “voluminous evidence it is flawed”.

    On the contrary there IS voluminious evidence that it beats 90%+ funds that try to pick stocks some other way.

    Hardly flawed! 🙂

    It *may* be that factor investing / Smart Beta offers some minority who follow that path superior returns, though the jury is out.

    But regardless, if all index tracking was smart beta (i.e. Active investing, albeit via an algorithim) then there’d be little/no edge. Active investing is a zero sum game, remember. 🙂

  • 13 Gregory February 1, 2015, 2:39 pm

    By the way the Vanguard FTSE All-World High Dividend Yield UCITS ETF is not a value fund. It is a blend style. See Annual report page 13. https://www.vanguard.co.uk/adviser/adv/investments/etfs/detailoverview?portId=9506&assetCode=EQUITY So The morningstar is wrong. Compare the fund charasterics. According to the morningstar the fund has 1,67 P/B but according the Vanguard factsheet the P/B is 1,9 (31/12/2014). Plus, from the launch (2010) of the FTSE All-World High Dividend Yield INDEX (not the Vanguard fund) it has underperformed the simlpe FTSE All-World INDEX. See FTSE website.

  • 14 Uncertain February 1, 2015, 4:42 pm

    From my reading of Bogle and cap weighted index funds he does seem to have been a bit of a visionary, as it was widely stated at the time, when the efficient market hypothesis was gaining traction, that you can’t buy the average. Bogle proved you can.
    As far as the efficient market hypothesis cap weighted indices have a meaning that no others do because they are the average of where money is invested.
    Smart beta is basically a slogan which is not beta at all it is claiming that you can get alpha through systematically investing in one of the wrinkles discovered in the efficient market hypothesis.
    Personally I share Bogles scepticism.

  • 15 Rob February 1, 2015, 5:20 pm

    What Bogle has done is to make a process, passive investing, synonymous with a measure, mkt cap. It is perfectly feasible to use a passive process with a different measure. But if the bulk of the money is allocated one way that way will, by default, beat all the others.
    My issue with mkt cap is that, as Schiller has demonstrated, it is more volatile than other measures, such as dividends. And this makes the mkt volatile than it need.
    To be fair that may be more die to closet trackers than actual trackers.

  • 16 The Investor February 1, 2015, 5:41 pm

    @Rob — I fundamentally disagree with you on this. 🙂 I’ll write a post.

  • 17 Jim McG February 1, 2015, 7:29 pm

    Love the quote from Bogle. The financial industry loves jargon that intimidates the rest of us and makes us feel intellectually inferior. I often feel that passive indexing is disdained because it’s simple enough for most people to understand.

  • 18 Rob February 1, 2015, 8:27 pm

    TI,

    Good idea:

    What is a passive fund?

    Rob

  • 19 Uncertain February 1, 2015, 9:56 pm

    My reading of what Bogle did was work out how to make an established theory the efficient market hypothesis work as a collective investment vehicle.
    This theory is based around the market cap indices.
    Calling it passive or anything else is pretty irrelevant to the fact that he is offering the average at a low cost and has also lead the way in driving costs lower.
    He is the major historical figure in low cost investing with a pretty substantial well researched background to his practice that has been vindicated in a big way.
    Anyone is welcome to disagree with his thoughts, but to say he has hijacked a process when he basically invented it is daft.
    Others may subsequently improve on what he has done but they are following in the footsteps of a giant and his vews deserve careful thought even if you subsequently disagree with them.

  • 20 Gregory February 2, 2015, 5:20 pm
  • 21 Naeclue February 2, 2015, 7:11 pm

    @Rob, I think you have misunderstood market cap index investing. This has nothing to do with price, instead it is about holding equal proportions of available shares. Price will fluctuate, but the proportion of shares held in a market cap fund will not, ignoring corporate actions. Take companies A with 10m shares available for investment and B with 1m shares. A market cap fund would want to hold these shares in the ratio 10:1. It does not matter what the prices of A and B are at any point in time, the fund will still want to hold 10 times as many shares in A as in B.

    When the fund has new money to invest, it will buy 10 times as many shares in A as in B. This does not skew demand, hence price, for either A or B. As the Investor has alluded to, market price setting/discovery is done by active investors, not passive market cap investors.

    I think market cap weighted investing is a misnomer. It would be better to talk about investing in the “Market Portfolio”, as some people call it.

    All sorts of mud has been thrown at index tracking funds, such as being “un-American”, or parasitical. I have some sympathy with that, but I would also say that anyone who works in financial services is on very thin ice when using the word “Parasite”.

  • 22 Paul W February 3, 2015, 1:57 am

    And it’s the only way not to affect relative prices. When you get it it’s obvious that’s the name for passive.

  • 23 Rob February 3, 2015, 8:16 am

    The issue, to my mind, is the differentiation between the process and the measure.

    The process can either be active or passive.

    The measure can be mkt cap or something else.

    What is lacking is a definition of a passive process.

  • 24 Paul W February 3, 2015, 10:37 am

    @Rob

    When you’re talking about passive investing you have to restrict it by the market capitalization measure. You can’t use another measure i.e. get rid of the proper restriction and still call it passive. You may not like the use of the word “passive” in this sense, I can understand that. But there you go – we’ve got a broader meaning in a specific context. It’s a useful and good description of the process and the effect of it. Buying apples only every month for £100, because this is the only dividend paying stock, could be called a passive process but that’s not passive investing. Nor is it enough for a fund to invest via an algorithm to call it passive in a useful sense.

  • 25 Naeclue February 3, 2015, 11:29 am

    Passive investing is another misnomer (marketing term) as the word implies no activity. In reality there is a continuum between highly active day trading and the completely passive investors who buy shares, put them in a drawer and forget about them, totally ignoring any corporate action notices that turn up. As far as I know there are no funds/ITs that offer this total neglect level of activity. Market cap index funds are the most passive collective investments as trades are only done as a result of certain corporate actions or companies leaving and joining the index. If a fund weights by anything else, p/b, beta, dividend yield, etc. then additional trades will be required to rebalance the portfolio. So if any investment fund is deserving of the label “Passive”, it would be the a cap weighted index fund, even though the fund is not really passive.

  • 26 Paul W February 3, 2015, 1:50 pm

    Weighing by anything else than market cap affects relative prices which is the real active effect. In that sense a fund can make no trades whatsoever and still be called active. Hence “passive” emerges as a synonym for index investing. But it doesn’t matter really if it is perfectly accurate. It has rather informative nature and can hardly be a marketing term because it is not particularly positive in this world. Isn’t it better to be active? I mean, better marketing decisions come to mind. I wouldn’t be surprised if it had been the active industry that put the label.

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