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2.04.2006

Karma 

Google had a rough week:



Seriously, Google is largely responsible for killing my portfolio this week, as it comprises somewhere around 3% (by value) of this mutual fund in which I am invested.

Analysts have blamed it on a disappointing 4th-quarter earnings report, but I think objective observers from outside of Wall Street, like myself, know the real reason.

Comments:

1. I am surprised that you own Contrafund, rather than an index fund or at least a smaller, more nimble fund.
2. Google's hit translates to a .5% drop in your Contrafund holding. Does that constitute killing your portfolio? Because Contrafund carries a 0.92% expense ratio anyway.
 


1. Fidelity's index funds require a minimum investment of $10,000, which I don't have. My IRA currently resides with Fidelity, which is why I'm invested there (though I might move to a Vanguard index fund if Contrafund fails to impress).

2. Contrafund has a fairly high expense ratio, but betting on a mutual fund is tantamount to betting on the fund manager, and the same guy's been in charge for the last 15 years. If I had a large sum of money to play with, I'd probably just stick in into the Dogs of the Dow.
 


I'm a big believer in index funds. You can buy exchange-traded funds (ETFs) with no minimum. I own VTI, which is basically identical to VTSMX, the Vanguard Total Stock Market Index.

When a fund does well, it's very difficult to know if the manager really was smarter than the market, or if he was just (in poker terms) "running good." Even if he truly outperformed, he may not be able to do so in the future, and it's especially difficult when you have a large fund to manage. Also, contrafund's 60% annual turnover means you will be paying capital gains taxes every year. (VTSMX turnover is 4%, and expense ratio is .19%.)

As for Dogs of the Dow, it was popular when I was in college, but then it got killed for several years in a row and I thought it was pretty much abandoned. (The Motley Fool guys, who did the most to popularize it, later repudiated it.) Has it been doing well again? I am deeply suspicious of it as an investing strategy, as it is very arbitrary (e.g., how many stocks do you use, do you use the Dow or S&P 500, etc.) and I think its past performance was largely luck. But as you can see, I think the market is efficient enough that I think that trying to beat it is a waste of time.
 


Here's a quote from a book I've been reading...

[in a smith barney study of 72 equity managers with >= 10 year track records]...

"For all the periods studied top performing managers were more likely to drop to the bottom of performance comparisons in subsequent periods than to repeat their peer-beating performances." In fact, "the investment returns of top quintile managers tended to plunge precipitously while the returns of bottom quintile managers tended to rise dramatically."

full discussion in link here (look for comment #27)

http://socialize.morningstar.com/NewSocialize/asp/FullConv.asp?forumId=F100000015&convId=87122&minReplySeq=21
 


Hey, if you believe in mean reversion, you could go with the Pigs of the Dow. Maybe GM is actually on the rebound.

Really, when you think about it, the DJIA and S&P are "arbitrary" in the same sense you used the word. The DJIA (S&P) are just a set of 30 (500) stocks that Dow Jones (S&P) thinks are representative of the market.

I definitely don't think it's a waste of time to try to beat the market, though making more than a handful of trades of year is silly if you don't do a lot of research. Things like the nose-dive from 2001-2003 and Google's stratospheric rise were entirely predictable. The collapse of the dot-com bubble was pretty predictable as well, though predicting a date for the start of the collapse would have been diffcult.
 


I'm also a big advocate of the low expense index funds. I have two Vanguard index funds which I put my after-tax money into. For my 401k, I'm limited in the options available, so I'm kind of stuck with higher expense funds.

A book that I found interesting on the stock market is "A Random Walk Down Wall Street", (it's upto 6th edition by now). It provides a lot of interesting data.

As for beating the market, I feel that with the current amount I have invested, it isn't worth my time. Let's ignore the case that I pick widly volatile stocks. Assume that spending four hours every week studying the market yeilds me an investment stragy that after expenses gives me 12% when the index funds give me 10%. So my investment of four hours every week yeilds 2% of my invested amount. Since my total invested amount is still reasonably small, that 2% works out to not a lot of money. Although in this case it is more money:
1. At an hourly rate, it wouldn't pay as well as other work which I can do
2. Although it is rapidly becoming less true, I think it is still the case that working on skills for my real job has a better return on investment with respect to money versus time.
3. Sacraficing four hours every week isn't worth it to me. If the stock market is just a hobby, then this isn't so bad.
So unless you have a lot of money in the market, it only makes sense as a hobby.
 


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