Hi Chinwhisker,

Thanks for your thoughts.  I actually have read Rick Ferri, Larry Swedroe, and the Four Pillars of investing.  My portfolio follows William Bernstein's.  I read Jack Bogle also, but I think he is a little different.  He suggests the Total Market Index fund, which is made up of primarily of large cap growth stocks, so I don't think you are as diversified as you would think. 

I agree that nothing is clear in investing.  Even the famous French Fama 3 factor model is challenged.  Skeptics talk about survivorship bias, bid ask spreads, etc., and say if you take that into account, it does not out perform. 

I don't know why people can't agree on something as simple as objective data.  As far as I know, people don't argue about the laws of classical physics. 

Thanks again,

Mark 

Hi Mark,

Sounds like you are well read, and the fact you used the words “classical physics,” I imagine you are well read in Quantum Physics as well, so I’ll leave that alone as well – enough egg on my face already. J

Like in classical –vs.- quantum physics, new and strange dynamics are not always easily accepted. Certain concepts like “Reward must come from risk,” and “Fixed income is the only way to reduce risk” are burned into the mind from years of acceptance as fact. When these theories are put into question, such as the atom being made of solid matter, moving faster than the speed of light, or even objects being in more than one place at a time, the earth is pulled out from under their feet.

It is difficult to accept the idea you can look at historical data a draw conclusions that can predict future characteristics of a portfolio with any certainty. Those who believe in EMH, strong or weak, don’t recognize the fact they are also using historic data to try to predict the future characteristics of a portfolio. “If you want to reduce risk, just add more fixed!!!”

Just by mentioning this, I may be setting myself up for a long argument from classical asset allocators. J

I just like to make sure folks understand what they are doing when asking questions such as this. May I ask why small blend as opposed to small value?

Chin

Hi Chin,

As for physics, I find the subject very interesting.  I know the high points of quantum physics, but not much more than that.  With classical mechanics, I've always enjoyed it, and had four classes in college in it, years ago.  It explains a lot more of everyday life, than quantum mechanics.

I agree with you that believers in EMH are also using historic data.  What is a little troubling is that people can't agree on the historic data.

I don't consider myself an expert on investing, because I think that overconfidence can destroy one. I think that Richard Thaler said that the most sophisticated small investors, realize not to use sophisticated techniques. 

To answer your question, Bernstein recommends 15% in small value, and 5% in small blend, so I am trying to fill the 5%.  I guess I have only one question.  Am I better off with a small microcap blend etf, or just a small blend etf.

 Thanks for your thoughts.

Best,

Mark

Hi Mark,

I too am not an expert, but then who is? Like quantum and classic mechanics, I only know enough about investing to be dangerous to anyone who wouldn’t know better than to follow anything I offer as advice.

I would think micro-caps would fit better in an Efficient Frontier consideration using Fama/French small and value weightings, which is, I could only assume, what Mr. Bernstein used when he set up the Vanguard Portfolio.

I must warn, I don’t have the same opinion with the means by which a portfolio would be set up on the Efficient Frontier, but am of the same mind by means of the concept. Then again, I see classical mechanics working better per our perceived realities. The bomb, nuclear energy and super conductor trains may be insignificant compared to what we will be experiencing in a few years through biotechnology, computer technology and quantum mechanics. What we view now as science fiction may be viewed as reality in just a few years.

I think the same holds true with investing, asset allocation, EMH, efficient frontier, &c.. Not only Bernstein, but I also don’t accept everything of my favorite author of investing, Larry Swedroe. However, I do think Larry goes well beyond the mediocrity of imitation in his considerations. Larry and I have had strong disagreements, but in these disagreements, I have come away with New Eyes in many directions.

I’m starting to ramble. As you can see, my thought process doesn’t allow me to maintain a classical view on pretty much anything.

I’m not a good one to offer advice to most.

Chin

Hi Chin,

Don't worry.  If advise does not work out, I never hold the person giving it responsible.  I have about 2/3 of my portfolio in efts, and use mpt.  I have another third in individual stocks.  I live in Boston, and am in a stock  investment club.  I tell everyone if their stock suggestion goes to zero, and I buy it, then I hold only myself responsible, because I use their suggestion as a guide, and then do my own analysis. 

There is considerable disagreement between bogleheads, and stocks pickers about what is true.  I tend to think that the mpt style of investing works better, but I would not dare mention that at my group.  It would be blasphemous. 

What really swayed me in that direction is I occassionally correspond with Travis Morien, who knows an enormous amount about all types of investing, and has read every book out there on stock picking, MPT, etc.  He is a professional financial planner, and after all his reading, decided that the Swedroe approach was the best one.

His website is Travismorien.com.

Thanks again.

Mark

Hi Mark,

I like Travis and his straight-forward, no BS nature. He is one of the ones who no longer join in on the conversations here I miss the most.  

My friends from the investment clubs and Foolish Collective at the Motley Fool weren’t too happy to hear I no longer saw individual equities as the best route for finding value in the market. Ironically it was a couple MBA courses on equity valuation and corporate finance I took with my friends at the Foolish Collective that made me realize the best way to find value in the market was to invest in the sectors of the market(s) that were least followed by analysts and the institutional investors.

The market analysts understand what I understand, but they are not going to give up their livelihood or be honest about their feelings on these matters with the general public. Dr. Damodaran, one of the accredited professors responsible for steering these young MBAs in the right direction warns them before his classes begin, before his class is over, they will believe more strongly in efficient markets.  

Most think they can see behavior in the market, as you said you could see where classic mechanics explain everyday life better. Both may be no more than an illusion. I understand the reasoning for the bubble of the 90s, because I can see where the market analysts and institutional investor who set the prices on Wall Street had to do the impossible -- identifying advances in technology and biotechnology, quantitatively. They also had to face financial manipulation that was near as difficult to quantify.

I also see how fundamental metrics fail to identify value in the markets, as it takes a huge amount of data to estimate the earnings of any given market. The S&P 500 is the most visible, but still difficult. Ask anyone who does macro how they account for net-share-buybacks. For the most part, I have gotten the defensive “Buybacks are speculative.” They might be less stable, but like the particle/wave, they are real. “Because it is difficult” is not a good reason to ignore something that makes a huge difference in valuations. As far as that goes, earnings are speculative.

It is often our understanding at fault, in what Einstein called “Predetermined prejudices.” Even he admitted suffering this flaw, huh?

A year or so back, Burton Malkiel threw me for a loop in an interview when he said, “If it adds diversification, it is probably a good thing.” This is an example of a man who has worked on a predetermined prejudice, EMT, who evolved.

What you think?

Chin

Hi Chin,

I have to think about your questions before I respond, because the concepts are fairly esoteric.  I may have more questions for you than opinions.  I will give this some thought, and get back in more detail after I have a chance to think about it.

However, I always love esoteric discussions. 

Best,

Mark

Hi Mark,

It's not so much esoteric, other than I look at micro economics in a way I am not sure those who look at macro economics accept, or possibly understand. I can see where actual economics, earnings, accounting, corporate finance, and even the valuation models change contributing to what outside observers draw conclusions on without consideration to all factors involved. At least that has been my observance.

The micro side uses valuation with only limited data, and the macro side uses data with only limited valuation considerations.

Like I said, it is only observance. I offer nothing as fact, only enough to create doubt over the possibility we can understand well enough to take risks of guesstimations.

Chin