Reply to @Charles: As for people who got out of stocks and/or who haven't gotten in and or who have fleed to bonds entirely, I think it's unfortunate that there's no exploration of the psychology after you have three years of almost consistent outflows of stocks and visibly less interest in investing (if measured by searches, business channel ratings, outflows etc.)
Maybe not "faux wealth", but people act as if it's a free lunch. As David Einhorn noted on CNBC a couple of years ago: "I think you can argue that, because we have gotten to the point where the transmission method is broken. You are trying to create a wealth effect which is another asset-based economy thing, it's very questionable whether higher stock prices cause lots of incremental demand, and you have the cost of food and energy which are real things that people have to pay for. And if you have to pay $3, $4 or $5 for gas, you have less money to go out to eat."
Commodity prices, highlighting Bernanke's time period:
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2013/02/20130227_Bernanke.jpg
Meanwhile, prices for many common needs continue to rise noticeably. Meanwhile, what % of people own what % of stocks in this country, while much of the rest just sees higher prices as the effect? The Fed has admitted that they are trying for a "wealth effect", and it's troubling that blowing one asset bubble after another would appear to be the only idea that government has. That's not a solid foundation or sustainable without continued stimulus. I agree with what Seth Klarman said the other day: "(The) underpinnings of our economy and financial system are so precarious that the un-abating risks of collapse dwarf all other factors."
Collapse? I don't think so, but I see big picture problems that aren't being addressed at all (not surprising, given you have a government unable to work together) and worry about social instability if the gap in this country between the haves and have nots continues to get wider. I remain curious about the continued ability to blow one asset bubble after another - if we go into recession, we already have ZIRP and QE.
Not saying anything against stocks, I think people have to own stocks because you have a government who has effectively given up decision making and told the Fed to (as Senator Schumer told Bernanke) "Get to work." They've been working with ZIRP and QE for the majority of the last four-five years, and I think they'll continue to until the next election.
While I'm not going to debate valuation, I do think this chart showing margin correlation to the markets is rather interesting:
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2013/03/20130301_indu.jpg

Reply to @scott:
Thanks Scott for the reply.I personally do not consider the Koch brothers infamous but they certainly have been characterized as that or worse by the same people who will continue to extol wind and solar as the best(only?) alternatives for future energy needs.The engineers employed by the Koch Bros. will continue to be more positive for everyday life for many more people than the financial engineers in George Soro's employ for the elite.
Here is what I could find concerning Cheung Kong Infrastructure.This is a very large Co.and as you said, with worldwide assets. Great 10 year stock chart,but like many Chinese Co.'s,has flattened out a bit since '08. BIP has performed much better in the past 5 yrs and I feel has a wider asset base including the ports,airports,and roads you have previously mentioned.
https://www.google.com/finance?q=HKG:1038&ed=us&ei=Qc0yUbjdPIOvqQGAJw
Here is another example of how liberally a supposedly narrow investment sleeve can be interpreted by a good manager.I finally discovered this fund late last year and would recommend it to expand one's real estate investments.You don't get the the dividends with a pure REIT fund holder but probably a better chance at growth as exemplified by the record.
http://www.baronfunds.com/mutual-funds/baron-real-estate-fund/brefx/?tab=Holdings#portfolioHoldings
The pipelines are probably a safer way to play the shale play.Talk about volatility,the explorers are not a game I want to play.Bought some CESDF on Fri on some slight weakness.6.29% dividend paid monthly.For now that's my play in the oil patch.Waiting for some weakness in INF.
Good primer on shale and energy here:
http://seekingalpha.com/article/1238721-shale-we-dance-how-best-to-profit-now-from-energy-investments?source=email_alternative_energy_investing&ifp=0
Thanks for your involvement and your non-condescending approach.

In the article one firm was allocating more industrial metals as alternative investment. Ironically the demand for industrial metals and most commodities are up when economy is in good shape in which case stocks will probably do well as well. I suspect when next crisis hits these alternative investments will fall short.
They are pushed to unsuspecting investors because of the fear of stocks and so-called alternative investments have become the way for these investment firms to replace the fees they had been collecting from stock investors prior to last financial crisis. Now bonds did not provide enough fees so they had to find and alternative for themselves. Not really for the clients.

Hi Investor, Hi Greg,
Thank you guys for taking time to reply to my post. Both your responses were thoughtful and thought provoking. They both added to the scope and utility of my original submittal.
Investor, the articles that you suggested greatly expand the usefulness of my posting by identifying two strategies that focus on the execution of retirement portfolio maintenance. Retirees and near-retirees will benefit from exposure to these two excellent summary articles.
Also, I was not aware that the author of the article I referenced was part of Paul Merriman’s FundAdvice staff. I did not recognize the potential conflict of interest. I like Merriman, but he has special incentives because of his financial relationships with DFA. There’s the possibilities of some biased opinions because of that relationship. Thanks for the heads-up. In this instance, I am not overly concerned of any major distortions or misrepresentations because I trust Merriman and I trust the DFA organization. Both do yeoman work.
Greg, your interpretations of the reported work, and your intuitions on possible outcomes for the scenarios that you postulated are spot-on-target.
Even today, for Monte Carlo codes that nominally adjust drawdown rates to reflect inflation rate changes, the Monte Carlo tools can be effectively used to examine the constant drawdown case you proposed. That’s simply done by setting inflation rate and it variability to zero in the inputs. The very first Monte Carlo code that I developed did not include an inflation adjustment. As you correctly perceived, the general contour, in terms of an optimum asset allocation distribution, are about the same both with and without inflation considerations. Portfolio failure rates are obviously impacted, but your excellent Bath-tube description as a function of equity percentages is still valid.
Indeed, being ultra-conservative by including too few equities in a portfolio is a risky proposition in a retirement portfolio, especially these days with extremely low fixed-income yields. Remember that fixed-income products also have a returns volatility aspect. That variability essentially means that any drawdown schedule from most fixed-income dominated portfolios must be lower than the expected overall average return from that portfolio because of that lowered, but still non-zero, volatility. In the end, that translates into either a very low permissible (and not acceptable) withdrawal rate or an unrealistically gigantic portfolio size.
Once again, thank you guys for your perceptive and useful inputs.
Best Wishes.

Aberdeen’s Bruce Stout, manager of the £1.4bn Murray International trust, has urged investors to diversify out of bonds to avoid heavy losses when central banks stop the printing presses.
Stout, speaking to shareholders as the trust reported its annual results today, said investors are underestimating the potential consequences of unprecedented central bank stimulus.
"A lethal cocktail of unparalleled levels of global debt and unparalleled global money printing, shaken and stirred by numerous financial indicators at multi-century highs/lows, suggests a global fixed income hangover is fast approaching," he said.
"There is no precedent within fixed income history to assess the likely damage, but significant sums of money will be lost."
Stout's fixed income pessimism is shared by Robin Geffen, CEO of Neptune Investment Management, who in December warned bond investors should brace themselves for severe losses when the interest rate cycle turns.
Geffen argues the long end of the bond market will fall between 30% and 40% when interest rates and inflation normalise.
http://www.investmentweek.co.uk/investment-week/news/2251064/shaken-and-stirred-how-to-beat-the-fixed-income-hangover
Citi strategist Matt King, who sent us this chart in December, put it this way: "Since 2007, credit mutual fund assets have doubled, while dealers' corporate bond inventories have halved. So while in 2007, it would have taken a 50% outflow from mutual funds to double the size of the street's inventory, now if there were to be a 5% outflow it would double the size of the inventory."
In other words, the "buffer" of higher inventories on bank balance sheets provided the market with liquidity.
Now, that buffer is gone.
http://www.businessinsider.com/citi-bond-funds-to-spark-next-crisis-2013-2

Very nice @MJG.
Larry Katz is the Director of Research at Merriman Inc., a Seattle Based Financial Advisor. These folks also ran FundAdvice.com which provided educational material although with the retirement of founder Paul Merriman last year, FundAdvice.com has lost some of its previous content that I used to refer to. (Update: The article you posted in available in perhaps a bit better format at here)
Two of my favorite articles are "Fine Tuning Your Asset Allocation" and "Ultimate Buy and Hold Strategy".
Fine Tuning Article contained a table that provided the performance, risk and max drawdown information for various equity and bond mixes. Armed with that information an investor could make a more intelligent choice what risk/return level he/she is comfortable with and the what sort of downside could be expected at the portfolio level. Here is the 2011 Update that I can find. They used to update this article with each new year data. If it is updated since 2011, it is not publicly exposed anymore. :( I'll try to ping them to see if they will continue to update this one.
For the other article they continue to provide year to year updates to numbers. There is now a 2013 Update to Ultimate Buy-and-Hold Strategy article. Direct link is here.
The article you have linked and these two provide a good set of educational material.

http://www.sec.gov/Archives/edgar/data/814232/000119312513077549/d491498d497.htm
497 1 d491498d497.htm RS GLOBAL NATURAL RESOURCES FUND
Filed pursuant to Rule 497(e)
File Nos. 033-16439 and 811-05159
RS INVESTMENT TRUST
Supplement to Summary Prospectuses for RS Global Natural Resources Fund
(Class A, C, K, and Y shares) Dated May 1, 2012
Before you invest, you may want to review the Fund’s prospectus, which contains more information about the Fund and its risks. You can find the Fund’s prospectus and other information about the Fund, including the Fund’s Statement of Additional Information (SAI) and most recent reports to shareholders, online at www.RSinvestments.com/prospectus. You can also get this information at no cost by calling 800-766-3863 or by sending an e-mail request to [email protected]. You can also get this information from your financial intermediary. The Summary Prospectus incorporates by reference the Fund’s Prospectus, dated May 1, 2012, as supplemented February 26, 2013, and SAI, dated May 1, 2012, as revised December 12, 2012, and the financial statements included in the Fund’s annual report to shareholders, dated December 31, 2011.
Effective March 15, 2013, the following is added to the section titled “Purchase and Sale of Fund Shares”:
The Fund is currently offered only to certain investors.
For additional information, see “How to Purchase Shares -- Other Information About Purchasing Shares” in the supplement dated February 26, 2013, to the Fund’s Prospectus, dated May 1, 2012.
February 26, 2013

Reply to @scooter: I like real, productive assets, but I think my likes have been too specific for broader funds. Brookfield Infrastructure (BIP) remains a very large holding and which was just upgraded by Raymond James (link) I like MLPs, but own Kinder Morgan given the company's remarkable size and scale. I like the "toll road" aspect of the pipelines and while they certainly have risks (headline risk, political risk, etc), you look at a Kinder Morgan that has 180 terminals and tens of thousands of miles of pipeline and, really, who could come in and try to replicate what they've built and compete on that level? Much like the rails, the major pipeline companies (Enbridge, Kinder, Transcanada and a number of others) are in a situation where it would be extraordinarily difficult for someone else to really come in.
I will not be allocating any more to these two investments, but will let dividends reinvest, and both provide significant dividends. Brookfield is a company and has company-specific risk (as well as the added paperwork of a K-1 at tax time), but it's unique in that it's almost a fund of specific infrastructure projects - everything from ports to pipelines to toll roads - around the world, and a pure and opportunistic play on infrastructure.
I also own a couple of other pipeline companies, one of which is a smaller recent investment in Australia's APA Group, which is the largest nat gas pipeline co in Australia (although they have some other investments besides pipelines.) That yields about 5.75%.
There are a number of infrastructure funds (TOLLX is a popular example), but I personally just like specific names.
Infrastructure has done well. Some other things not so much. I own Glencore, which I like from the standpoint of the company's demonstrated skill in commodities trading, as well as the company's remarkable collection of real assets, which includes hundreds of thousands of acres of owned or leased foreign farmland. They also bought grain handler Viterra (although some of that is going to be sold to other companies) and are in the midst of merging with miner Xstrata, which turned into a long, strange trip lasting the last year. Glencore has not done well, but it's a long-term (and I think very unique) play that I still like very much.
I've noted recently that I like WP Carey, which turned into a REIT last Fall. "From the CEO: "The premise is pretty simple. We buy a company’s most important real estate, and then we lease it back to them for a long period of time, 15 to 25 years typically. During that time, the contract includes rent increase provisions, typically those would be CPI-related, but not always. Sometimes they’re fixed rental increases. So we get the benefit of that rising income over time, and that’s where you get your cycle resistance, because no matter what’s happening in a local market at a given time, if the tenant continues to pay rent as they’re expected to, then you’ll have rising income. But at the same time, because it’s a triple-net lease structure and the tenant pays the taxes, the insurance and the operating expenses, the investors are not exposed to cost inflation." The company has demonstrated - pretty consistently - success in this field.
I continue to like the Asian conglomerates. Jardine Matheson has done better than Hutchsion Whampoa, but the latter is one of the world's biggest port operators and owns one of the world's largest health and beauty retailers. Both are trading around book value, but still are certainly not without risk. Jardine is more consumer-centric, but I like it's Dairy Farm subsidiary a good deal, which has done very well and includes some exposure to familiar brands, including a few IKEA stores in Asia.
I like telecoms. I owned (and bailed, d'oh) on Vodafone after it has continued to disappoint and while I won't go as far as to call it a value trap, I don't think it's the value I initially believed it was - not a real serious mistake, but I'll admit it was a mistake on my part. I still own - and consider a long-term holding - another foreign telecom company that has fared better.
I like rail, although I think I like it from the standpoint that some are seeing benefits from oil exploration (like Buffett's Burlington Northern). However, some are seeing benefits and some have lagged, especially those who had a focus on coal.
I like some tech more than others. I like Google. I don't like MSFT. I like what I call "financial technology" a good deal. This includes investments in things like mobile banking and other advancements in payment technology (EMV, mobile payments.) I think this is a long-term story. I don't own it, but I think Fiserv is a US example of something that fits into this category (FISV). Visa and MC are as well, although I think these are still tied heavily into the strength (or not) of the consumer.
It sounds unusual for me, but I actually like Wal-Mart. The company offers some emerging markets exposure (they own 51% of Massmart in South Africa, for example); the company's scope and logistics expertise is astonishing and I think there is still a large part of the population reliant upon WMT's low prices (and probably go there for cheaper pharmacy prices). Look at today's earnings call from Dollartree that was very positive, and Target's - which wasn't so hot. Wal-Mart's attempts to integrate more technology in the shopping experience can be seen with Wal-Mart labs, and I think WMT takes more share as places like Best Buy have trouble. It's also taking away market share - I think - from some grocers. The only other retail play that I find interesting but it's not high on my list is Fast Retailing, a Japanese company whose Uniqlo subsidiary is moving into the US and trying to take on Gap.
Wal-Mart is boring, but I think that - with a portion of one's portfolio - is that boring can be beautiful. Procter and Gamble and General Mills are other examples, although are overbought - I think - at this point. However, large established brands that pay nice dividends that you don't have to babysit are something that I think should be considered.
I like yield. Every single name I own offers a yield, many of them a very nice yield. If I can like the business and get paid a very nice yield to wait, that's really optimal, that's what I'm looking for.
I like healthcare, but - with a couple of exceptions - it's something I play with a fund and would recommend owning a fund. I understand some things and some broad concepts when it comes to modern medicine, but I certainly don't have a degree in modern medicine and a lot of it I either don't feel I'm qualified by any means to analyze or it's just greek to me.
Abbott Labs, which is now heavily nutrition (Ensure, etc) and whatnot) after it split and has considerable EM exposure is another example I like. Yacktman isn't entirely a match for this, but it remains heavily in large, established brands like PG, Pepsi, Coke, J & J, etc. There's also the SPLV low volatility ETF, as well as AQR's US Defensive Equity Fund (AUENX). Yacktman, SPLV and AUENX are not going to do as well when the market is ramping, but should allow one to sleep a bit better at night, and SPLV offers monthly dividends, which of course means the appealing ability to reinvest monthly. I think given where the market is now, if someone wants to add something new (although I'd wait for a pullback, but for those who don't want to wait...), the SPLV with its monthly dividend and portfolio of very large, established names, is an appealing option.
I do not own a fixed-income specific fund, although there is fixed income within some funds, such as AQR Risk Parity and Ivy Asset Strategy.
In terms of long-term themes, I like water and agriculture (there are ETF's and an Allianz fund for water, and ETF's for ag). These are volatile.
I also continue to like funds that have greater flexibility, including funds like Marketfield. I get where people are coming from with their concerns about FPA Crescent, but I continue to strongly agree with FPA Crescent manager Steve Romick and think the fund remains a very good choice. I am also positive on First Source Wasatch Income and Parnassus Equity Income, as well as the Matthews Asian equity income funds.
Sorry I couldn't be more help on the fund side, but I think my interests have gotten lately specific to the point where I've become interested in single names.
Lastly, rather than the rally monkey that some sites post, I'll offer... well, Microsoft's Ballmer acting like a nutcase. Only, this time, this is "Ballmer: The ITunes Remix."

A fund that offers a unique point of view, has flexibility, is not heavily correlated to the market and has a demonstrated track record of success (in this case, with the company's hedge funds) is appealing. I view this fund as part of a second generation of long-short vehicles that are more flexible with the definition (this doesn't even fall into the l/s category on Morningstar, interestingly.) Funds that, despite being "long-short" funds, realize that there's going to be times where there aren't many short opportunities, and have the ability to dial up and down risk to a greater degree. I think these funds may lose more in down markets than a number of their long-short peers, but also have the potential to capture more of the upside in up markets than many of their long-short peers.
Marketfield also falls under this category, as well. These funds definitely rely on management calls (although certainly every fund does), but I believe that the flexibility offered will be positive in the years to come.
Otherwise, I've thought for a while that essentially A:) we didn't learn anything from 2008, it was just "how quickly can we throw money at the problem to reboot everything?" However, with the Fed doing what it was doing, you had to be invested. Now, as I said the other day, it's nearly 5 years later and the Fed is still doing QE and ZIRP and the training wheels have not been taken off. What if we do have a recession, or are we not going to have them anymore because they'll just be met with more QE?
Seth Klarman noted the other day that, "(The) underpinnings of our economy and financial system are so precarious that the un-abating risks of collapse dwarf all other factors."
Personally, I think, despite what markets have done, there is some degree of shakiness to the foundation because what has happened is built on what the Fed has done, but nothing more than that; there has not been real reform to the financial system to strengthen the underlying foundation.
Or, as Jacob Rothschild recently noted, "“We are living through a
period of unparalleled
complexity and
uncertainty.” These
words remain as
regrettably true today as
when I wrote them in
my report to you two
years ago. To avoid the
situation becoming even
worse, governments
continue to roll their
printing presses in one
form or another. Their
actions prevent systemic
collapse but the deeper
underlying problems
remain."
That's not to say that I think people should freak out. That's not to say that I think you should sell everything. However, I think if someone is in retirement age or near retirement age especially, take a look at what you own and realize that the markets have been very comfortable the last few years. They may remain comfortable, but realize that there remain real issues here and abroad that have not really been addressed at the core level. If the market did have a substantial downturn, would you sleep well at night? If not, this may be a point, given where markets are, where you want to address that. That's not to say that a substantial downturn would be another 2008, and there are funds that allow people to remain invested, but with less risk and volatility. There's no one path to recommend, because everyone is different and everyone has different goals, different risk tolerance, etc, but I think the general idea is to remain invested but - at this point (especially if you're towards retirement age - maybe dial down risk a bit if you believe that some of what you own may not fare well if things were to turn South at this point.
As for the Whitebox letter, I think confidence in treasuries comes down to a belief that the Fed can buy enough paper to keep rates low, but I think retail investors continue to pile into bonds because they believe that there's a level of safety in bonds that can be maintained for the foreseeable future and they're looking for yield. That "safety" can go on for longer than anyone can think it will, but eventually the Bond market will turn South. People continue to reach for yield (no surprise, given that they can't earn anything in CDs or other "risk-free return") in fixed income and REITs and MLPS, but I think personally, given the environment, I'd rather own real, productive assets and get yield from that.
Additionally, as Marc Faber noted - and I agree with, at least for the foreseeable future - "I think that in equities you will be better off because you have an ownership in a company, than by being the lenders to companies, and the lenders, especially, to governments." If the bond market really turns substantially (and possibly suddenly), I think it will be large, institutional-level sellers that do it. It's not going to be all the retail money that has gone into bonds that will be first to leave.
In terms of the even the "rosy" scenario discussed in the Whitebox letter, I think there are some fairly large transitions implied by that, and while they may just go smoothly, I tend to believe that large transitions by many people, at one point or another, tend to get disorderly. Hopefully not. I do agree with the favoring of well-established large caps and I think a Yacktman or "Yacktman-like" fund of big brands and established names an appealing place to be right now vs taking more aggressive risks.
As for the Fed and Treasury losing credibility, that will likely never happen, because the Fed is the Great and Powerful Oz. The Treasury is, well, some new guy. I tend to wonder if there was ever a real loss of credibility for the Fed if it would ever be started internally, and wonder if it would be more likely an external event. But, that's neither here nor there.
I did find the discussion of "devaluation is inevitable" if treasuries rise towards 600bps rather interesting and I would have liked the letter to go into a little more detail on that.
There have been a lot of discussions of the implications of rates even getting back to rates considered "normal" lately, and it makes me tend to believe that if that occurs sooner than later, it would be due to things getting disorderly. I also question whether we will get the growth that is needed that is discussed in the letter, and if we do, it becomes a matter of how much is that growth actually costing, and the diminishing returns on the cost of buying the appearance of growth.
Overall, I think that people should not freak out, but realize that there are real risks that have not been addressed in the financial system and real obstacles yet ahead. Things, in terms of the markets, have been very comfortable for a while. I'd say stay invested, but the time to look to reduce potential volatility and risk is not in the midst of crisis, it's when everything seems comfortable.

Dear MJG,
Thanks for joining the discussion.
From your most recent post –
”…tentative attempt to forecast market movement.”
“…composite forecasting criteria…”
“…to forecast market movement…”
I find it interesting that you attempt to forecast the market,
even though you have posted numerous times that forecasting
is an unproductive activity.
To keep this short, the single Simple Moving Average device
that we’ve been discussing is NOT a forecasting device.
It identifies and follows the major market moves.
Every financial advisor on this planet recognizes that when the market (S&P)
is above the 200-day simple moving average we’re in a bull market and when it’s
below, we’re in a bear market.
BTW, I couldn’t locate the Monday WSJ data you mentioned.
Flack

Doctor Doom's outlook is short-term bullish, long-term catastrophic:
“The risk of the end game from QE is not going to be goods inflation, it's not going to be a rout in the bond market,” Roubini says. “The risk is ... (that) ... we could create an asset bubble worse than the previous one, which could lead to another financial crisis not this year, not next year, but two or three years down the line ...."
http://finance.yahoo.com/blogs/daily-ticker/nouriel-roubini-bullish-now-mother-bubbles-begun-140143386.html

http://www.sec.gov/Archives/edgar/data/1406305/000119312513068397/d490156d497.htm
1 d490156d497.htm GATEWAY TRUST
GATEWAY FUND
Supplement dated February 21, 2013 to the Gateway Fund Prospectus, dated May 1, 2012, and Gateway Fund Summary Prospectus, dated May 1, 2012, as may be revised and supplemented from time to time.
Effective immediately, J. Patrick Rogers no longer serves as portfolio manager of the Gateway Fund. All references to Mr. Rogers and corresponding disclosure relating to Mr. Rogers are removed.
Effective February 21, 2013, the information in the “Portfolio Managers” sub-section within the section “Management” in the Summary Prospectus and the Prospectus is revised to include the following:
Paul R. Stewart, CFA, president and CEO of the Adviser, has served as co-portfolio manager of the Fund (including the Gateway Predecessor Fund) since 2006.
Michael T. Buckius, CFA, senior vice president and chief investment officer of the Adviser, has served as co-portfolio manager of the Fund since 2008.
Kenneth H. Toft, CFA, senior vice president and portfolio manager of the Adviser, has served as co-portfolio manager of the Fund since 2013.
Effective February 21, 2013, the reference to J. Patrick Rogers in the sub-section “Meet the Funds’ Portfolio Managers” within the section “Management Team” in the Prospectus is hereby deleted.
Effective February 21, 2013, the sub-section “Meet the Funds’ Portfolio Managers” within the section “Management Team” is revised to include the following:
Paul R. Stewart — Mr. Stewart joined the Predecessor Adviser in 1995. He served as treasurer of the Predecessor Trust through 1999 and as chief financial officer of the Predecessor Adviser through 2003. He became a senior vice president of the Predecessor Adviser and began working in the area of portfolio management in 2000. Mr. Stewart was appointed chief investment officer of the Predecessor Adviser in 2006 and president and CEO of the Adviser in 2013. He served as co-portfolio manager of the Gateway Fund since 2006. Mr. Stewart received a BBA from Ohio University in 1988. He holds the designation of Chartered Financial Analyst.
Michael T. Buckius — Mr. Buckius joined the Predecessor Adviser in 1999 and holds the positions of senior vice president and chief investment officer. He has been a co-portfolio manager of the Gateway Fund since 2008 and serves as co-portfolio manager of three funds sub-advised by Gateway. Mr. Buckius holds a B.A. and M.B.A. in Finance from Loyola College in Baltimore. He holds the designation of Chartered Financial Analyst.
Kenneth H. Toft — Mr. Toft joined the Predecessor Adviser in 1992 and holds the positions of senior vice president and portfolio manager. He has been co-portfolio manager of the Fund since 2013. Mr. Toft holds a B.A. and M.B.A. from the University of Cincinnati. He holds the designation of Chartered Financial Analyst.

I'm rather new at investing, and it has taken a while to get up to speed on some of the complexities of this endeavor. Having decided to pull the trigger on my own, I'd like to ask the many experts on this forum a couple of questions.
1. Are all segments of the M* blocks needed for a well-rounded portfolio? I have small caps and a great deal of large caps covered. Does one need mids or can I forgo this segment?
2. I have become enamored with Warren Buffett and his financial empire and would like to have some of his in a mutual fund. How do I find out which funds carry his stock? I looked at M* and found you can get a top ten or so funds, but how about the hundreds of others that are not listed?
3. I believe price plays a role in profits. Should I come up with an arbitrary number that will delineate funds for purchase or not? In other words is it acceptable to have a cut-off of, say 1.10 ER as a high end on whether to buy?
4. Finally, do you guys ever buy Transaction Fee funds through the brokers or is this a crazy thing to do?
Thanks for any comments that will help me navigate this fun and hopefully profitable project.
Mike

Dear friends,
We spent a bit over an hour talking with Andrew Foster of Seafarer Overseas Growth & Income. About 50 people phoned-in to listen. Among the highlights of the call, for me:
1. Andrew offered a rich discussion about his decision to launch the fund. The short version: early in his career, he concluded that emergent China was "the world's most under-rated opportunity" and he really wanted to be there. By late 2009, he noticed that China was structurally slowing. That is, it was slow because of features that had no "easy or obvious" solution, rather than just slowly as part of a cycle. He concluded that "China will never be the same." Long reflection and investigation led him to begin focusing on other markets, many of which were new to him, that had many of the same characteristics that made China exciting and profitable a decade earlier. Given Matthews' exclusive and principled focus on Asia, he concluded that the only way to pursue those opportunities was to leave Matthews and launch Seafarer.
2. He believes that Seafarer has three distinguishing characteristics. (1) They're obsessive about bottom-up research and don't try to make calls about currencies or regional dynamics as part of the process. They may factor such things in but only because they bear on a particular firm that interests him. (2) Their portfolio is built by a single individual, driven by individual securities, rather than by some combination of multiple overlaps, portfolio sleeves and internal corporate politics. The fact that he's "immensely afraid of failure" leads him to a carefully conceived, concentrated portfolio. (3) Their focus is on sustainable growth, with income. He tried to avoid "high concept" stocks and especially those whose success is largely dependent on the whims of politicians or bureaucrats. His preference is for more seasoned firms with slower, sustainable growth paths.
3. Income has three functions in the portfolio. (1) It serves as a check on the quality of a firm's business model. At base, you can't pay dividends if you're not generating substantial, sustained free cash flow and generating that flow is a sign of a healthy business. (2) It serves as a common metric across various markets, each of which has its own accounting schemes and regimes. (3) It provides as least a bit of a buffer in rough markets. Andrew likened it to a sea anchor, which won't immediately stop a ship caught in a gale but will slow it, steady it and eventually stop it.
4. On whole, he believes that equities are more attractively priced than are fixed-income securities, hence he's about 90% equities.
5. As markets have become a bit stretched - prices are up 30% since the recent trough but fundamentals have not much changed - he's moved at the margins from smaller names to larger, steadier firms.
6. The fund can, but generally won't, hedge its currency exposure.
7. Following Teapot's question, Andrew suggested that the devaluation of the yen bears very careful attention ("it's very much worth paying attention to"), at least in part because a falling yen was one of the precursors of the Asian financial crisis in the late 90s.

Apologies to all: at about this point, my 12-year-old discovered that I'd bought a "new" used car today and began celebrating. Part of the celebration involved snatching the phone upstairs from my study and attempting to dial friends.

8. As long as the fund is growing, yield will look low and tax efficiency will look relatively high. I hadn't thought about it before: he might receive a dividend check in September when he had $12 million in the fund but when he pays it out in December, that check gets spread across a much larger group of shareholders (there was $28 million in the fund then) so each receives less.
9. The fund instituted a second set of expense reductions, this one voluntary, that they hope to be able to make permanent but they'll have to wait until August to see what's economically possible.
10. He will not invest in firms domiciled in any country where he and his staff cannot safely travel. They need to make face-to-face encounters with management teams, in part to discover the identities and agendas of the actual "control persons," but he won't put his folks' safety at risk for the sake of an investment lead.
Bottom-line: the valuations on emerging equities look good if you've got a three-to-five year time horizon, fixed-income globally strikes him as stretched, he expects to remain fully invested, reasonably cautious and reasonably concentrated.
I'm wondering what other folks heard, too.
David

Hi Guys,
First and foremost, I want to thank each and every MFO member who visited my posting. The response was overwhelming and very satisfying to me since the goal of every single of my submittals is to educate, to inform our band of brothers.
Secondly, and no less importantly, I particularly want to extend a thank you to those members who contributed excellent commentary. You prepared outstanding viewpoints that balanced the discussion. We all benefit from these divergent standpoints. No single person understands all the fascinating machinations and mechanisms of the marketplace. Your special perspectives are always welcomed and truly appreciated.
It appears that my chosen title is somewhat controversial. Good. It was selected to capture the prospective audience’s attention, and by the readership count it performed exactly as designed. In addition, it closely and purposely mirrors the title of Peter Lynch’s famous book whose objective was to inspire individual investor participation, education, and potential profits.
I partially concur with some contributors that specifically “Beating the Street” for that singular purpose is a shallow objective for most investors. It might satisfy some egos, but it will not necessarily enhance one’s retirement comfort. Please take note of my qualifier “necessarily”. I attach a deeper, embedded purpose to that common phrase. Let’s dive into the weeds now.
I naturally anticipate that under normal circumstances a retiree with a several million dollar portfolio need not Beat the Street; he might not even need to beat inflation; his goal might just be wealth preservation. However, for most retirees a fair return in excess of inflation must be the target.
Before constructing a portfolio, a target return is estimated based largely on projected annual withdrawal rate demands and expected timeframe. There are other factors too. During the construction of that portfolio, an asset allocation determination is made to satisfy that target goal with minimum risk. In many instances, risk is defined in terms of portfolio volatility.
The commonsense logic is that only risk sufficient to meet the required portfolio drawdown rate is acceptable. I’m a total investment amateur, but a highly seasoned one; I have never earned a dime giving financial advice. But that’s how I developed my portfolio over two decades ago; I propose that some professional advisors that participate on this fine site do the same.
A guiding principle that controls much thought in cobbling together a portfolio is broad product diversification, including international components. None of this is novel stuff. I do not invent these concepts: I do deploy them. Essential elements that go into that portfolio assembly are mutual fund statistical data sets like average annual return, return standard deviations, and correlation coefficients.
The forecasted portfolio returns must be high enough to satisfy the clients projected drawdown schedule. If a client needs a 4 % drawdown rate above inflation, short term government bonds will simply not do the job. Historically these short term government bonds only generate about a 0.7 % annual reward above inflation rates. Therefore, to satisfy this hypothetical customers needs, more additional product risk (likely equities) must be introduced into his portfolio.
How much of each asset class is required to resolve the allocation issue? That depends on the expected reward profiles of each investment class candidate. What are those levels? An excellent zeroth order point of departure is the historical returns (pick your own timeframe) registered in the past. These data are precisely the Index returns that represent the marketplace overall and for various subcomponents of it.
So equaling or beating the Indices (Beating the Street) is a crucial part of both constructing and assessing (measuring) the current status of a portfolio. That portfolio was assembled with certain forward looking expectations; expectations that were basically grounded in Index returns. That portfolio is in trouble if those expectations are not realized. So Beating the Street is a measure, a benchmark of the health of a retirement portfolio.
If a portfolio continuously fails to achieve street-like rewards, most advisors will eliminate the faltering elements and select replacements. If the advisor uses Morningstar as a data source, it is highly likely that the advisor will never select a one-star fund. Denials aside, most advisors base their initial selections on recent performance in general, and specifically contrasted against an Index reference standard.
How do financial advisors gauge their success? One reasonable answer is to compare performance against a carefully constructed benchmark. Typically, the benchmarks are composed of Indices which are themselves a proxy for the marketplace. So “Beating the Street” is really just an alternate way of saying that the portfolio is doing its intended job.
Since portfolios are built using Index returns as a likely returns pattern, a failure to achieve those forecasted returns implies dire consequences for the portfolio’s survival likelihood unless changes are implemented.
Language has developed to facilitate communications. It is mostly successful, but since it has been around for so long, alternate meanings and interpretations sometimes interrupt or interfere with its goal. Such might be the case here. Language can be a tricky business.
For me, “Beating the Street” is about equivalent to “Beating the Indices”. As a retiree, “Beating the Indices” means that my portfolio is keeping its head above water insofar as my planned withdrawal schedule is being preserved. It is an embedded performance measurement tool, not an ego adventure; it functions like a calibration device.
It’s interesting to note that even Wall Street bankers did not use this simple measurement concept as late as the early 1960s. In Peter Bernstein’s superb book “Capital Ideas”, he relates a story from Bill Sharpe. When Sharpe lunched with these bankers, he questioned them about their performance relative to some relevant benchmarks. No banker could answer his question. In that period, these professional financers did not measure their performance against any reasonable standard. We have come a long way since those times.
One final clarifying point is needed.
For the record, when I use the term “guy”, I mean it as a gender neutral term. That’s the way it is used in our household; that’s the way it is in many households. Sorry if it offends some of you guys, but it makes writing much easier for me. In all ways, I respect women for their financial acumen. They run their households efficiently, and they invest wisely. I often reference studies that conclude that female investors outperform their male counterparts. That’s accomplished by trading less frequently. Good for them.
Once again, thanks for your readership, and thanks for your informed contributions. I enjoy discussing these matters with you all.
Best Wishes.

To say the least the question is flawed. Without a clearer proposition and set of terms all participants agree to, this donkey can't fly. Perhaps the OP laid out the relevant terms and definitions in his lengthy expose' --- don't know. Doesn't matter unless everybody agrees to them.
Since all will have different perspectives on relevant terms like: market, investor, investing, active and passive management and the correct time-frame for consideration, little can be accomplished to resolve such a poorly worded proposition. That's not to say the comments on both sides aren't valid. They are - as each approaches the arena (meaning "combat zone" and not necessarily "circus") from a different perspective.
The proposition - or something like it has been promulgated for years - John Bogle being a major proponent. Over very long periods (measured in multi-decades) it holds truth to this extent. (1) Since all things tend to "average-out" over the very long term, (2) And all else being equal, (3) Than financial contracts (Isn't that what ownership of an asset really constitutes?) which exact the lowest cost from the participants to construct and execute will over time prove the more profitable to the participants. The key qualifier is of course: "All else being equal." As the many responses demonstrate - they seldom are.

Reply to @scott:
1. You are amazing.
2. What a truly sad situation if your comment is true (beyond obviously exploitative shops like Edward Jones):

...to some degree it's the desire of financial companies not to have the populace (as a whole) highly educated in terms of investing.

Reply to @Charles: Very beautiful pic!
Here's an example of a lesson learned. I invested - probably about a year and a half more or less, in a London closed end fund (it's on the US pink sheets) called Dolphin Capital Investors. It is invested heavily in Greek (and surrounding area) resort property. It had been ob-lit-er-ated, going from about $3 and change to about 30 cents. The property owned is gorgeous - just beautiful. The book value, if one were to believe book value, was a couple of bucks. The investment was rather tiny - a lottery ticket bet.
A while later, the situation in Europe got worse and it hadn't done anything (was likely already at the point where anyone who'd wanted to sell had GTFO). Again, the position was small enough that it didn't matter, but it wasn't doing anything and I just gave up on it. Had I waited not that much longer, Third Point took a stake in it in the Fall and it just about doubled. The situation in Europe was getting worse, but the story hadn't changed - the land was still impossibly beautiful, still traded at a fraction of book - and I didn't need to sell. It wasn't doing anything and I got bored and wanted to move on to something else. Had I waited a little longer, the idea would have started to play out as I'd hoped it would. Who knows - it still trades at a fraction of book value (at about 26% of book value, according to Yahoo Finance), but the idea being that I learned a lesson from being too short-term on an idea.
The Andersons is an unfortunate instance in terms of volatility. There are not too many plays (in terms of publicly traded companies) on what I call "agricultural infrastructure" at all in the world, and fewer as they get bought up (Viterra, which was bought by Glencore, which I own) or are in the process of maybe getting bought up (Graincorp, which I owned and then sold when Archer Daniels Midland made an offer).
The Andersons is a very Americana company - Ohio company with grain elevators around the Midwest, a railcar operation, Fertilizer operation, ethanol operation and a small retail operation - there's even a division that makes things out of corn cobs, such as pet bedding. Family operation that started as a single grain elevator and still remains family-run. A couple of the smaller aspects I could do without, but a lot of great, productive assets. Still, it's a very small float and it's almost absurdly volatile. The seasonality of it, if it plays out again, makes for a great trade, but it's too bad as I'd love to own the assets over a longer-term. If the Archer Daniels Midland/Graincorp tie-up does not happen, I'd own Graincorp again in a second, as while that isn't low-key either, it has a terrific dividend policy.
Instead, I own Glencore, which is highly volatile, but offers a global collection of productive assets (including hundreds of thousands of acres of owned or leased farmland), is well-managed and rather infamous. ("The Biggest Company You Never Heard Of": http://www.reuters.com/article/2011/02/25/us-glencore-idUSTRE71O1DC20110225 - "Bigger than Nestle, Novartis and UBS in terms of revenues, Glencore's network of 2,000 traders, lawyers, accountants and other staff in 40 countries gives it real-time market and political intelligence on everything from oil markets in Central Asia to what sugar's doing in southeast Asia." "Their knowledge of the flow of commodities around the world is truly frightening." )
It also is another instance of a story playing out as it absorbs Viterra and Xstrata (and possibly more over the next couple of years), becoming both a large-scale commodity company and the largest commodity trading company on the planet.
Glencore has not done as well as I'd hoped and it's been a long, strange trip with the Xstrata merger that involved sovereign wealth funds and mediation by former Prime Minister Tony Blair in the middle of the night. (http://www.dailymail.co.uk/news/article-2200655/The-million-dollar-man-How-Tony-Blair-wafted-Claridges-secure-massive-pay-day-just-hours-work.html) "Tony Blair made $1 million in less than three hours by brokering late night talks between billionaire businessmen trying to save a £50billion mining deal."
However, despite issues, I remain a long-term holder, as I think Glencore remains a value and unique in terms of what it offers. Additionally, I think it's evolving as it becomes a much larger entity.
Mark said: " Consider the market investment road you traveled to reach that point and how long it took you to reach that end. I'm assuming that it's a radical departure from the vista you perceived when you began your investing travels. It certainly is for me."
I think the market has an incredibly short-term mentality in modern day and I think people are effected by the rapid money flows one way or another - as I've noted before, the average holding period for a stock has gone from several years to several days. However, I think there's real downsides to attempting to keep up with what's working now aside from the fact that I think it quickly becomes exhausting and not enjoyable. Personally, for me, it becomes a matter of having a selection of duller, consistent, low beta names and a selection of bets on various themes and/or assets that are - to varying degrees - more aggressive. If the story changes, I'l definitely reconsider, but I don't see selling anything I own for quite a while, and will continue to reinvest dividends when possible.
________________________________________________
As for fundamental problems that keep people out of the markets, I think:
1. If you are an investor in this country, it's likely that you taught yourself to some degree, because there is nothing at the high school level regarding personal finance. I think that's terribly unfortunate. I think to some degree it's the desire of financial companies not to have the populace (as a whole) highly educated in terms of investing. Still, if everyone was educated in personal finance at the high school level, you wouldn't have situations like the Facebook IPO, but I think you would have less volatile markets and a population that would likely see greater benefits from financial markets. People are still going to chase hot stocks, there's still going to be issues, but if people go out of high school with basic knowledge about personal finance and investing, I really don't see a downside.
2. I think people remain insecure and concerned about the big picture (as noted above) and do not want to commit to anything not believed to be safe. However, I'm a little concerned that a lot of average people do not understand the workings of the fixed income market and will be disappointed if bonds really turn after believing that they are safe.
3. Trust is broken and that will take time to repair. People don't trust the markets and I think to some degree I don't blame them. The media doesn't explore the reasons why people are staying out of markets, nor does it try to assist people - you instead get stories in Smart Money and the like that essentially scream, "YOU'RE MISSING IT! WHAT'S WRONG WITH YOU?" It doesn't help anything or anyone.

Hi Guys,
It was a different investment community forty years ago. In that hazy past, the odds were that individual investors were mostly trading with each other.
In that yesteryear, private investors executed 70 % of the daily trading volume; institutions accounted for the remaining 30 %. The science or art of investing was very primitive; it was basically dumb, weak money exchanging stocks with equally dumb, weak money. There were remarkable exceptions; these exceptions quickly became rich (and sometimes poor again cyclically).
Today, that structure has been completely reversed and turned on its head. Now the bulk of the trading (like 70 %) is done by smart, strong institutional money. As an individual investor, it is highly likely that if you are trading some equity position, an institution is taking the other side of that gamble.
That trading partner poses a significant threat. Over time, he has become relatively and absolutely a more powerful opponent. His advantages are manifested by his composite unbounded financial resources, his unfettered timeline, his formal educational background dominated by top-tier MBA graduates, his mathematical sophistication especially in the statistical and operations research arenas, his unlimited research time commitment, his supercomputer access, and his sheer numbers.
The institutional participant is a daunting challenge to private investors. It is not a fair or a level playing field. It is something like the championship Baltimore Ravens professional football team competing against a ragtag group of tag football high school part-time players. The outcome is basically predetermined.
In the early 1990s, Peter Lynch published his blockbuster best seller “Beating the Street”. He projected that the “average Joe” could tame the excesses of Wall Street. Lynch ended that exceptional tutorial with 25 Golden Rules for superior investment outcomes. However, even at that earlier date, the private investor was becoming overmatched by the resources and skills of the institutional giants.
Even the legendary Peter Lynch magic was eroding. His major outsized performance was registered in the late-1970s to the mid-1980s. In that glorious period, his firm permitted him to participate in the inefficient small company and foreign company marketplaces. He invested so broadly and prolifically that it was said that Lynch never saw an investment opportunity that he did not like. But the times turned against him in the late-1980s, and he struggled to generate market-like rewards for his now excessively large client base. He salvaged his reputation by retiring in 1990 at age 46 after a few very mediocre years.
Interestingly, Jeff Vinik, Fidelity managements replacement for the departing Lynch, was soon summarily fired in 1996 when he attempted an ill-fated timing rotation to bond positions. Even as early as the 1990s, the major investment houses were clamping down on the freedom of choice prerogatives that were afforded earlier superstars like Peter Lynch. Vinik eventually recovered while launching and managing a highly profitable Hedge Fund operation. He currently owns a host of professional sports franchises around the world.
That’s spectacular success, even for a Jersey-boy. It does prove a major point. Rare as they likely are, active investing can have huge paydays.
But, there has been a sea change that has made the task far tougher for today’s amateurs, semi-pros, and even full time professionals. Everyone is substantially smarter, better informed, and can react with computer-like lightening speed.
The global statistics collected at places like Morningstar, Dalbar, and Standard and Poor’s demonstrate just how demanding it now is for the part-time investor to produce excess returns above market Index averages. When reviewed in total, these data sets are dismal for the individual investor. On average, we investors recover only about one-third of the returns that the mutual funds that service us deliver. We are pitiful in our entry-exit timing maneuvers. The marketplace is essentially a winning institutional game now.
I recognize there will always be a few highly skilled, insightful, and lucky souls who will outperform the dominating monoliths. They will be rare birds indeed. There are so many smart, informed, and talented financial outlets nowadays competing for the golden ring that they tend to neutralize one another.
They cancel each other out, quickly negating any momentary advantage, and deliver sub-par performance to their customers because of the continuous frictional cost to compete so energetically. Costs are like a hole in a water bucket; it’s a constant drain to wealth accumulation under all circumstances.
So, currently, my takeaway is that it is nearly impossible to “Beat the Street”. That’s just not going to happen for most of us.
But some segment of us will persistently try. Many current MFO members are in this camp. What is the game plan, the strategy, and most importantly, the prospects for this brave band of fearless warriors? Let me invent a likely generic profile to explore the issue for comparative purposes.
The committed private active investor is middle aged with a college degree. He is smart, dedicated, motivated, and industrious. He exchanges ideas on websites like MFO, accesses Morningstar for needed mutual fund data, and probably visits sites like Pony Express Bob to identify momentum attractive candidate funds for consideration. He likely deploys technical analyses using charts to guide perhaps a sector rotational strategy. It is a time-consuming struggle to access and absorb the mountainous pile of data available. Constant attention is necessary. Decision making is a lonely process.
Given the dominance of institutional investors these days, his competition is probably an institutional giant. Perhaps it’s a Boston behemoth, perhaps one of Chicago’s monsters of the midway, or perhaps it’s a team from the illustrious New York Genius network. Surviving against that cohort is hazardous duty. Given their many advantages, the odds of outwitting and outplaying these fierce and tireless opponents must approach zero. And adding the heavy burden of costs into the equation only deepens the challenge.
Given today’s environment and the lineup of market participants, what Peter Lynch interpreted as an individual investor advantage has morphed into a decided disadvantage. Currently, an active private investor is definitely playing a Loser’s game.
Why fight the tape? Since smart institutional investors engage to neutralize one another, an increasing number pf this elite club are joining the passive investment universe. Their numbers will swell in the future. It is doubtful that these numbers will ever penetrate the 50 % level, since institutional warriors enjoy the hunt and the profit incentives too much. That’s all goodness because active market participants are necessary to supply the requisite market pricing mechanism. Pricing competition keeps the marketplace roughly efficient.
Indexing is a reasonable solution to this dilemma for individual investors. It guarantees just short of market rewards if the low cost and low trading disciplines as advocated and practiced by outfits like Vanguard are followed. Even Warren Buffett has acknowledged the wisdom of this approach for most investors.
I encourage you to seriously consider the passive Index option for a more comfortable retirement. Although I currently own a mixed bag of actively managed and passively managed mutual funds/ETFs in my portfolio, I am slowly switching to more and more low cost passive holdings. Portfolio management need never be a overly simple either/or decision; compromise is a useful tool to reduce risk.
So it might well be time to step away, not to smell the roses, but to readdress your portfolio mix. The accumulating evidence overwhelmingly demonstrate a participant sea change and a slowly developing tsunami of institutional investors flooding towards the Index option. Recognize those perturbations and respond to your own special interpretations of those factoids. The institutions are making smarter decisions these days; just look at their profit margins
Certainly there will always be winning active investors who produce outsized market returns. Jeff Vinik is one such wizard. But there will also be lottery winners too. The key is to forecast these winners and their persistence. That’s a Herculean chore. Fat chance on accomplishing it.
Talk to you guys further down the road.
Best Regards.

Good article Ted. I liked the part about frequency of checking portfolio (which I do daily =)) most interesting:

In a financial context, myopic loss aversion is represented by the frequent evaluation of a portfolio’s performance, which can lead to shifts in an investor’s long-term asset allocation mix. Checking a portfolio’s performance more frequently increases the likelihood of seeing a loss, which produces more mental agony than comparable gains satisfy. This, in turn, can cause investors to tolerate less exposure to more volatile assets.