Bernstein 3
Posted: Sun Jul 11, 2004 12:49 pm
These comments refer to Chapter 3 of our currently featured book The Four Pillars of Investing by William Bernstein.
I was very disappointed with this chapter. I think that John Bogle did a much better job in Common Sense on Mutual Funds and I think that the discussion about timing in Dynamic Portfolio Theory and Management is far superior.
[I do not recommend Dynamic Portfolio Theory and Management since it differs radically from my own investment approach. In terms of certain factual discussions, however, it is excellent. It advocates extremely active trading (once per month). I extracted some key observations in my book review.]
http://nofeeboards.com/boards/viewtopic.php?t=2725
There is one section that I consider misleading. Other sections are OK if you keep in mind that William Bernstein is comparing actively managed mutual funds and index funds.
The section Why Can't I Just Buy and Hold Stocks on My Own? is on pages 99-102. William Bernstein compares owning the Market with owning randomly selected portfolios of 15, 30 and 60 stocks.
Exactly what constitutes the Market is not clear. It is identified as being at the 50th percentile of returns (page 100) and as being the S&P500 index (Figure 3-6 on page 101). I know of no reason that the market should be the 50th percentile absent assumptions (about the symmetry of returns) that I would consider questionable.
My best guess is that the graph is normalized to the return of the S&P500 index, but not necessarily at the 50th percentile.
The next issue is how the portfolios are weighted. The S&P500 index is weighted by capitalization. Presumably, the randomly selected stocks are equally weighted. (They could be weighted by an equal number of shares or weighted by equal dollar amounts. My best guess is that it is by equal dollar amounts.)
This means that we are comparing oranges and pears.
The outrage is how individual stocks are selected: completely at random! There are none of the standard guidelines such as investing across different industries. There is not even a minimal effort to eliminate the very worst companies. There is no screening, such as by value.
What William Bernstein actually shows is how a portfolio containing a limited number of stocks selected entirely at random compares with the market as a whole. He shows that it can do better or it can do worse.
The apples to apples comparison is this: individuals cannot do any better than hypothetical chimpanzees when picking stocks entirely at random.
Most of the chapter is much, much better. Still, I prefer alternative sources.
Have fun.
John R.
I was very disappointed with this chapter. I think that John Bogle did a much better job in Common Sense on Mutual Funds and I think that the discussion about timing in Dynamic Portfolio Theory and Management is far superior.
[I do not recommend Dynamic Portfolio Theory and Management since it differs radically from my own investment approach. In terms of certain factual discussions, however, it is excellent. It advocates extremely active trading (once per month). I extracted some key observations in my book review.]
http://nofeeboards.com/boards/viewtopic.php?t=2725
There is one section that I consider misleading. Other sections are OK if you keep in mind that William Bernstein is comparing actively managed mutual funds and index funds.
The section Why Can't I Just Buy and Hold Stocks on My Own? is on pages 99-102. William Bernstein compares owning the Market with owning randomly selected portfolios of 15, 30 and 60 stocks.
Exactly what constitutes the Market is not clear. It is identified as being at the 50th percentile of returns (page 100) and as being the S&P500 index (Figure 3-6 on page 101). I know of no reason that the market should be the 50th percentile absent assumptions (about the symmetry of returns) that I would consider questionable.
My best guess is that the graph is normalized to the return of the S&P500 index, but not necessarily at the 50th percentile.
The next issue is how the portfolios are weighted. The S&P500 index is weighted by capitalization. Presumably, the randomly selected stocks are equally weighted. (They could be weighted by an equal number of shares or weighted by equal dollar amounts. My best guess is that it is by equal dollar amounts.)
This means that we are comparing oranges and pears.
The outrage is how individual stocks are selected: completely at random! There are none of the standard guidelines such as investing across different industries. There is not even a minimal effort to eliminate the very worst companies. There is no screening, such as by value.
What William Bernstein actually shows is how a portfolio containing a limited number of stocks selected entirely at random compares with the market as a whole. He shows that it can do better or it can do worse.
The apples to apples comparison is this: individuals cannot do any better than hypothetical chimpanzees when picking stocks entirely at random.
Most of the chapter is much, much better. Still, I prefer alternative sources.
Have fun.
John R.