Hi Guys,
I thank you all for your participation in this exchange. The demonstrated interest in the posting far exceeded my expectations.
Although I have taken a position that simple Index investing delivers persistently superior returns when contrasted against active portfolio management, I have consistently acknowledged that the active versus passive management controversy is still an unsettled debate. Much depends on goals, timeframes, risk adversity, and current economic and political realities. There is plenty of room for a diversity of opinions.
I make no claims to any prescient forecasting skills, nor any special investing talents. You should all execute an investment policy that permits you to sleep comfortably every night. I do. But I do have preferences based on 50 years of practical investing experience and considerable financial/economic/investment/mathematics studies.
Based on this multi-discipline effort, I have mostly concluded that Index investing delivers portfolio return outcomes that generally exceed those that would be generated by an active approach. Note that I used the “mostly and generally” qualifiers to my statement. There are no 100 % guarantees in the uncertain investment universe.
I immediately concede that a passive portfolio will never top an annual ranking of all portfolio options in any given year. But it will likely be in the top one-third. Extending the time horizon beyond an annual rating, that passive portfolio will tend to climb the ranking ladder because it is consistently and persistently in the top one-third returns grouping each and every year. Active management will have better individual years, but will also generate sub-optimum results a few times that it will do harm to a long-term performance record.
Given all this, I still own a mixed active-passive portfolio. I embrace the challenge of selecting superior fund management talent. This is not an easy task.
One of my more recent fund management heroes is the former Yale endowment fund guru David Swensen. For years, his investment prowess produced double digit returns for Yale
I also liked his willingness to change his viewpoint while writing his popular book :Unconventional Success”. Initially he drafted the book to recommend his complex investment philosophy, realized that individual investors could not be reasonably expected to execute that complex strategy, and restructured the book to finally endorse a passive Index fund investment program. More power to a guy who is willing to alter a position because of practical considerations.
In my earlier submittals, I briefly mentioned that even university institutional endowment powerhouses like Yale, who employed the best-money-could-buy investment experts and wisdom, were recognizing the difficulties of persistently outperforming the overall marketplace. Many of these institutions are now committing a larger fraction of their wealth to Index products.
One reason for that defection is surely the paucity of exceptionally skilful fund managers. Another is the cost for these managers and the research needed to identify excess returns opportunities. I believe that the recent dismal performance of these university endowment projects has boosted the defection rate. There are several recent references that carefully document the disappearing excess returns for this institutional class of investors. Here is a Link to one of them:
http://www.nytimes.com/2012/10/13/business/colleges-and-universities-invest-in-unconventional-ways.html?pagewanted=all&_r=0
Click on the NY Times graphic to see that a simple Index portfolio outperformed the endowment average returns over the last three years and equaled the largest endowment group for the last five year period.
Here is a Link to an article that reports on a former university endowment manager’s attempt to replicate the endowment investment style in a mutual fund structure:
http://www.thebamalliance.com/BAMNewsMakers/BAMNewsMakersArticles/tabid/100/entryid/101/more-bad-news-for-college-en
The project is performing poorly. Some things are not easily transferable. I particularly like the closing summary in the brief referenced article, so I close with it.
“The implication is striking: If Yale, with all of its resources, cannot identify the future alpha generators, what are the odds that any individual money manager, investment advisor or other endowment can do so? This is why I believe that active management is the triumph of hype, hope and marketing over wisdom and experience."
The devastating conclusion of this closing paragraph, that was directed at the investment world’s big players, is easily extrapolated onto the investment opportunities map of individual investors.
Regardless, I wish us all successful investing as we pursue our own separate pathways.
Best Wishes.

Dear MJG,
You said, "In the financial world, if you don’t trust and deploy statistical analysis, you are doomed to fail."
Can you prove this?
Or maybe your definition of statistical analysis is so broad that you assume that nobody
will dare question your statement.

The Power of Gold
Great book, a nuanced narrative probably grating to hardcore bugs.
Between the American Civil War and World War I, gold became the near-universal standard, ''a symbol of sound practice and a badge of honor and decency,'' said Joseph Schumpeter, the great economist. The era was known for prosperity and financial stability. But Mr. Bernstein sides with Benjamin Disraeli, who said in 1895, ''Our gold standard is not the cause but the consequence of our prosperity.''
http://www.nytimes.com/2000/10/22/business/book-value-it-certainly-glitters-but-what-is-it-worth.html
Iow it was Disraeli's view that the Golden Age of the gold standard wasn't what allowed for an extended period of relative peace and prosperity, lessening the cheating,
currency wars, that spiral into conflicts but rather it was the extended period that allowed for the continuance of a gold standard.
10% in PMs mostly FSAGX VGPMX, added some this week.
Gross--
The countdown begins when investable assets pose too much risk for too little return; when lenders desert credit markets for other alternatives such as cash or real assets.
REPEAT: THE COUNTDOWN BEGINS WHEN INVESTABLE ASSETS
POSE TOO MUCH RISK FOR TOO LITTLE RETURN.
Visible first signs for creditors would logically be 1) long-term bond yields too low relative to duration risk, 2) credit spreads too tight relative to default risk and 3) PE ratios too high relative to growth risks. Not immediately, but over time, credit is exchanged figuratively or sometimes literally for cash in a mattress or conversely for real assets (gold, diamonds) in a vault.
http://www.pimco.com/EN/Insights/Pages/Credit-Supernova.aspx#.UQp3KOIdHWo.twitter

Reply to @philpill:
Hi Philpill;
Thanks for your response.
I am familiar with the Bernstein-Pony Express challenge. Indeed the Pony Express system easily defeated Bernstein in that long ago challenge. But could that happen again if the challenge were repeated many times such that results would be statistically meaningful? I simply don’t know. My current interpretation is that it was a singular event and not likely to be repeated.
If you trust the rather vague Pony Express methodology documentation, I suggest you invest using their forecasts and selections. Let us know how it works out. I wish you luck.
I like Sheldon Jacobs very much. Earlier in his career he was a regular at the Las Vegas MoneyShow. He was always humble about his projections. Jacobs sold his forecast letter business and retired a few years ago when his formula began to breakdown. The last time I saw him, he had the sorry aura of a defeated man.
I understand that Mr. Jacobs will appear at this years Vegas MoneyShow in mid-May. I look forward to attending his lectures once again. I suspect his very simple analytical methods have changed.
Sorry that you quoted and agree with Disraeli’s statistics assertion. In some areas his observation might be applicable, but investing is not one of them. In the financial world, if you don’t trust and deploy statistical analysis, you are doomed to fail.
Without a comprehensive understanding and body of statistical data sets, how do you finally make an investment decision? I hope you don’t use a Ouija Board or animal entrails. Statistical data are the lifeblood serving mutual fund decisions, both from the fund management and the fund buyer perspectives.
Good luck. I really mean it. But since you search for persistency, you are actually using statistical methods without acknowledging it.
Best Wishes.

http://www.sec.gov/Archives/edgar/data/1096344/000091957413000409/d1350636_497.htm
497 1 d1350636_497.htm
FAIRHOLME FUNDS, INC.
The Fairholme Fund
The Fairholme Focused Income Fund
The Fairholme Allocation Fund
Supplement dated January 29, 2013
to the Prospectus dated March 29, 2012
The Fairholme Fund
The Fairholme Focused Income Fund
The Fairholme Allocation Fund
The following is added as the first paragraph under "Purchase and Sale of The Fairholme Fund Shares", "Purchase and Sale of The Income Fund Shares" and "Purchase and Sale of The Allocation Fund Shares" in the summary sections of the Prospectus for The Fairholme Fund, The Income Fund and The Allocation Fund, respectively:
The Board of Directors has authorized the Manager, in its discretion, to determine that, at any time, shares of the Fund will no longer be offered and sold (including in connection with reinvestment of Fund distributions) to any or all investors, including existing shareholders. The Manager has determined, pursuant to this authority, to suspend the sale of shares of the Fund to new investors, effective as of the close of business on February 28, 2013.
Effective as of the close of business on February 28, 2013, the Fund will suspend the sale of shares to new investors, including new investors seeking to purchase Fund shares directly from the Fund or indirectly through financial intermediaries. Subject to the rights of the Fund to reject any order to purchase shares or to withdraw the offering of shares at any time, shares will remain available for purchase to existing shareholders.
The following is added directly under the title of the section "BUYING AND SELLING SHARES OF THE FUNDS; INVESTING IN THE FUNDS" in the Prospectus:
Effective as of the close of business on February 28, 2013, the Funds will suspend the sale of shares to new investors, including new investors seeking to purchase Fund shares directly from the Funds or indirectly through financial intermediaries. Shares of the Funds will remain available for purchase to existing Fund shareholders. Each Fund retains the right to make exceptions to the suspension of the sale of its shares to new investors, and reserves the right to subsequently commence selling its shares to new investors. Investors may request information by calling Shareholder Services at 1-866-202-2263.
* * *
YOU SHOULD RETAIN THIS SUPPLEMENT WITH YOUR PROSPECTUS
FOR FUTURE REFERENCE.

Reply to @Mona:
Hi Mona,
Again I hesitate, so I’ll proceed with a bit of circumspection and self-control.
One major factor in my cautious decision process is an anticipated time-consuming controversy that my innocuous, neutral revelations would promote from some MFO members. I say innocuous and neutral since I do not especially recommend my particular selections for anyone else’s portfolio. That’s forever a personal decision.
As evidence of a likely disruptive explosion, just consider the harsh and unnecessary buzz that Skeeter’s portfolio announcement made. It necessitated numerous defensive replies from Skeeter that are wasteful time-draining sinks. I choose not to enter that ruinous minefield.
A few habitual MFO contributors tend to emphasize the negative; they are whiners and nit-pickers. They’d arguably find fault with 1 % of a posting that is designed to be informative and educational. As Julius Caesar wisely remarked “ Don’t be concerned with small matters!”. Some MFO participants seem to be consumed by small matters.
But do not despair, all is not lost.
I’ll partially address your question with my generic plan of how to construct a portfolio that is mostly Index-based, but has a small fraction that is committed to nudge annual returns in the direction of excess rewards.
First, the assumption is that the portfolio is dominated by Index products that could or could not include bond holdings. It does not matter. The mix is basically designed to achieve a specific market return goal. That baseline mix depends on the financial needs and time horizon of the portfolio holder. That baseline portion of the entire portfolio should be well diversified to control volatility risk.
Since the actively managed component is a minor fraction of the portfolio, it must be aggressively constructed to potentially yield a meaningful bump to the nominal returns. Otherwise, why accept the incremental performance uncertainty?
How to assemble such a riskier portfolio sleeve? Hire an active fund manager with a superior long-term performance record over numerous market cycles, with a well funded research staff, with a low cost structure, and with a low turnover history. A fund that holds many positions is probably going to reproduce market rewards. Therefore, a highly concentrated, highly focused fund is needed to improve the odds of extra returns.
That’s a tough set of selection criteria that typically can not be satisfied by a single fund. So hire several funds that each exhibit a few of the target characteristics.
Here are a few candidates that I have used in my earlier portfolio management history. I still own a few of them, but not all. So I launch a few decoys to draw direct fire away and to protect my rules of engagement. In military terms, clutter is sometimes deployed to penetrate a staunch defensive position.
Dodge and Cox equity fund (DODGX) has established an experienced long-term management structure, low costs, and low portfolio turnover record. Academic research concludes that these features offer the prospects of a good excess returns likelihood. Never any guarantees under any circumstances.
Along the star manager and focused fund dimensions I have owned Marsico Growth (MFOCX) fund and several Masters’ Select Funds products (MSEFX, MSILX, MSSFX). These funds had modest portfolio turnover numbers and above average expense ratios, but offered access to star-caliber management and highly concentrated portfolios. The Masters group has the added advantage of constant star manager review and replacement if needed.
I also have used a variety of Fidelity and Vanguard funds for various reasons. The Fidelity research team is top tier. Vanguard preaches and practices cost control to the extreme. Examples include Fidelity Contra (FCNTX), Fidelity Low Price Stock (FLPSX), Vanguard Health Care (VGHCX), and both Vanguard Wellesley (VWINX) and Wellington (VWELX) in the balanced fund category. Each featured seasoned managers, cost containment, and disappearing low to high (bothersome) portfolio trading. In particular, the Vanguard Health Care sector play was purchased because of an aging US population. You can’t always get what you want.
As I mentioned, at one time or another, I held these funds in my portfolio; I still own a few of them. I make no claims that my current mix is anywhere near optimum, whatever that means in terms of the Markowitz Efficient Frontier. Most of my present positions are value-oriented. In this timeframe, I do very little new candidate fund screening. The best research hints that such an effort is close to futile after the very poorest prospects are easily eliminated. Superior and persistent fund performance is illusive; there is the strong pull to regression-to-mean.
I am sure that many members of the MFO community have far more insights than I do in the fund selection field. My work is somewhat dated. I propose that you seek their well informed and well intentioned advice .
As a final caution, keep in mind that every specific fund must fit into the total portfolio framework, and must work within the context of the overall portfolio objectives.
Also, please recognize that this is not the only way to assemble a fundamentally Indexed portfolio with a small supplemental actively managed component; it is merely my simple way.
I hope this helps just a little and that you persevered through the ranting.
Best Wishes.

Reply to @MJG:

I choose not to reveal my current actively managed portfolio positions. I fear they may do the MFO community more harm than good. A proper portfolio is unique to an individual

MJG,
I appreciate and respect your thoughts. However, in your post Re: Equity Side of Portfolio Now in Rebalance Mode ... Reducing Equity you stated:

Since you are well aware of my proclivity for low cost, conservatively managed financial products, it will not surprise you that I selected Vanguard’s short-term investment grade corporate bond fund (VFSUX) to fill that requirement.

I submit the two comments are incongruent.
Mona

Reply to @Investor:
Hi Investor,
Thanks for your response; it will allow me to expand on what I define as cash.
I use a loose, non-academic definition for what I classify as my cash holdings; it is definitely not rigorous from a portfolio management perspective since it does accept some hopefully limited downside risk. The devil is always buried in the details.
I own very little bank cash or money market accounts. The predominant portion of what I call Cash, and is available as my war-kiddy, is invested in a short-term corporate bond mutual fund. Many offer immediate access with very little (pennies per share) risk. For years, I have used these resources successfully for emergency purposes.
Since you are well aware of my proclivity for low cost, conservatively managed financial products, it will not surprise you that I selected Vanguard’s short-term investment grade corporate bond fund (VFSUX) to fill that requirement.
It has served me consistently well, although I did resist withdrawals just a little during the 2008 market downturn. Nothing in the investment universe is absolutely perfect. But the long-term accumulated rewards greatly exceed a few difficult encounters and infrequent penalties.
Best Wishes.

Do you get those periods where you just don't want to "play investments"? Or perhaps just become plain disgusted with the whole messy world of investments? Or whatever other reason(s) may come into place.
Well, now; no one has to reply to the questions above, but these may be some areas we all travel from time to time.
'Course, if one doesn't want to play investments at some point in time; this would also presume that one's investments are currently in some mode of market exposure, eh? What in the world would you do about that?
Where and what to shuffle; and why?
We have central banks playing race to the bottom for interest rates to "stimulate or force" investors to go play in shark (big money houses) infested waters. Reportedly the big players have at least 70% of the market action; and are not really always paying attention (i.e.; JPMorgans London whale trader) to where the monies may be playing. One may suppose that if I were a psychopathic minded person in charge of a large money operation and knew that I had the full faith and butt-coverage of any ill fated investments from a government organization; I too would have little concern of where the monies may be playing, eh?
With the U.S. population at about 315 million today; perhaps the best experiment would have been to place real money into the hands of the population. Would this be any less of a grand monetary experiment versus the current policies? Over the past 4 years, every citizen would have received about $15,873 (based on a $5 trillion number) or $3,970/person/year. For 2013, and the reported $1trillion of bond purchases to take place, the number would be $3,175/person. Better yet, the monies would be taxed; but the taxes wouldn't be paid (depending upon the tax bracket) until the next calendar year. A one year float for an individual or family of the monies. 'Course not all of the money would be spent properly; but this is no different than current policies; but at least the individual(s) would decide for themself, eh?
Bank of Japan does a full Ben Bernanke/Mario Draghi move.....official statement, Jan. 22, 2013
BOJ, governor statement, Jan. 25, 2013
The news reports have changed quite a bit since August of 2012. There are less and less "official" and "reported" stories about the ills of the financial systems that still remains. Did all of the problems just go away? I think not.
Who/what is playing a game with this?
The long and drawn out circumstances; many of which have been discussed here, are still in place. Many of the common citizens of Europe and the U.S. have no more money in their pockets today, versus 2008. Have the large banks of the world become more stable with the quality of their reserve holdings? Find an official, current and truthful report and it may be discussed properly.
What are the true values of anything into which we invest? Perhaps our house should just grab the best 10 balanced/flexible funds, and let the money ride upon the high crest of the "funny money" and hope to also retain our mental balance at this house, at the same time. :)
It is not only that too much debt (bonds) continues to be issued in all forms by those needing to raise cash; but that the cheap and easy money continues to feed investment fires in many places. Is an indicator such as VTI worthy of a 12.3% increase since mid-November of 2012, with about 1/2 of this since Jan. 1, 2013? Five year and 52 week highs may be found looking over any equity investment fence one chooses to view from. Are these highs for real reasons; or just too much electronic money needing a good home for a few months at a time. Is the Federal Reserve, as has been noted from time to time, actually playing in equity indexes in an attempt to paint a brighter picture in this all important area of market psychology; that all is well or better or healing?
This house really does not like the smell in many areas. Easy to say and note to just watch and move away from something when the investment is no longer producing; be it income or capital appreciation or both. Easy thoughts, but a tougher action to command.
The wayback machine finds my recall of some of my generation and their perceptions of reality or not, with the use of certain "recreational" drugs. Not much difference in this current investing world; except the drug is now information and/or the lack of straightforward information and what to do with same; and at the same time, be in place among the players who really control the strings from which our house's investment puppet dangles.
The games and big players in the market place are not new, of course; as such actions would follow as far into the past as one could find recorded evidence. At some point in time, in the past; the "salt" markets were manipulated for gain. But, the rules, regs. and size of the game today is beyond any historical levels during this house's investment life span. This is the most troubling aspect today, in my humble opinion.
As noted a few weeks ago; our house will have much less time for several months going forward, with which to stay in the loop of current monetary events. While some of our bond holdings may maintain some forward value; the alternative at this time to smooth into a decent return for this year via a blend into some equity sectors is not favorable at this time; in our opinion. While some individual investors may indeed run back into the equity market at current price levels; we are not comfortable with adding monies at this point. 'Course, this may just be a 30% year for the SP-500, without much of an unwind period. If this is the case, our portfolio will not have much of a positive shine for 2013.
Our bond fund mixes are both up and down, resulting with a +.44% YTD. 'Course, some captial is being preserved; but capital appreciation is missing from many bond funds that have anything to do with investment grade. And yes, it sure is tempting to look at the equity side for the past 6 months and just get the itch. Heck, our 529 account using 50/50 of VBMPX and VITPX is + 5.2% YTD. Hopefully, the big kids won't be too nasty; if/when they choose to unwind some of the equity sectors.
Okay, enough from me today, about all of this. The writing helps to "de-funk" the attitude.
Take care of you and yours,
Catch

Reply to @Charles:
Hi Charles,
Thanks for the kind words and for your many informative submittals to the MFO site.
I haven’t formed a detailed assessment of Joel Greenblatt’s several investment books and the formulas that he recommends because I have not read his works.
Professor Greenblatt emphasizes individual stock selection criteria, and I have stripped my portfolios of all individual stock positions for over 3 years now. Individual stock selection is an immensely time consuming effort that exceeds my current interests and capabilities. I am trying to simplify my portfolio management demands. Time is my most valued commodity.
So, I do not plan to directly read Greenblatt’s research findings. But I did become loosely familiar with his value-oriented approach through secondary source material.
In general, I like his methodology. In a broad sense, he is a proponent of the Benjamin Graham investment philosophy: buy stocks that are priced below their intrinsic value. One secret of that philosophy is to determine a reasonable estimate of a firm’s intrinsic value. That is not an easy or obvious task. Hence, just like Graham, Greenblatt endorses application of a margin of safety policy.
It’s interesting that both Graham and Greenblatt are from the Columbia University staff.
Over the long haul. Value investing seems to be less risky than other alternate styles. Fama and French discovered an extra return from value dominated approaches when finalizing their 3-factor market model. The two criteria that Greenblatt formulated are perturbations of several respected value criteria. Therefore, I suppose that the Greenblatt method has the potential to deliver superior returns; the approach offers plausible advantages.
Greenblatt has publicly acknowledged that his secret formula is not bulletproof. He recognizes that the method will underperform for substantial periods. That’s realistic. The Professor recommends that any investor who considers his system must be patient and be persistent. We have heard that wisdom many times over.
In the end, the proof will be in the 4 mutual fund products that Joel Greenblatt now co-manages. Morningstar tracks them, but their record is too thin for a respectable performance assessment. Initially they got off to a great start, but seem to have faltered a bit in 2012, underperforming proper benchmarks. The proper benchmark is an important evaluation tool. In some of his original comparisons, Greenblatt benefited by choosing a far less than perfect comparison Index. Many financial product marketers do the same, purposely.
I do not like the idea of a 20 to 30 stock holding portfolio. That’s too concentrated a portfolio that does not fully take advantage of diversification benefits.
At one time I was a member of AAII. I found their analysis fair, insightful, and informative. Here is a Link to a review that was generated by an AAII contributor:
https://www.aaii.com/computerizedinvesting/article/using-the-magic-formula-for-investing.pdf
The concluding remarks in the work by Cara Scatizzi is excellent and solidly reflects my judgment on the matter, so I close with it:
“Like any stock screening strategy, blindly buying and selling stocks is never a good idea. Developing and implementing disciplined buy, sell and hold strategies is a better option. Greenblatt’s Magic Formula is not revolutionary, but does provide a new twist on the old value investing ideas. While his past record is impressive, it will be interesting to see how the screen holds up during this period of market turmoil and its aftermath.”
Time will reveal the ultimate judgment on the Magic Formula.
Best Wishes.

Reply to @Shostakovich:
Hi D. S.
Thanks for your interest.
Please keep in mind that my current portfolio contains active components at the peripheral, perhaps 30 %. However, I expect I will always maintain a small fraction of our composite portfolios in the active category.
It is not so much that I anticipate any excess returns generated will make a substantial contribution to our end wealth. It will likely not based on past performance. Our portfolio’s rewards will be mostly controlled by the passive component contributions.
It is the challenge of the hunt that nurtures our family (my wife participates in any decision making) zeal to squeeze just a little above market returns from our portfolios. The risk is minimal from an end wealth and from a portfolio ruin viewpoint.
My portfolio building career extends into the investment modeling dark ages (mid-1950s). Given my formal engineering and mathematics training, I initially attempted to master the marketplace with charting and technical analysis. An early edition of Edwards and McGee was my first technical analysis text purchased in the financial arena.
Through the decades, as academia published meaningful research papers, my investment philosophy and style matured. I was open-minded enough to experiment.
I went to a broad diversified portfolio guided by Markowitz’s and Sharpe’s findings. I did small and value oriented equities after Fama and French issued their 3-factor model. I ventured into momentum mutual fund buying when momentum factors were discovered that enhanced annual returns, at least with a year or two of persistence.
There was a highly publicized quant era, a formidable concentrated, focused fund theory, and a superstar fund manager period. There were numerous combinations of these concepts. I likely participated in all of them and granted them three year exploratory trial periods.
There is the efficient market controversy that might be exploitable. I still believe it is an unsettled issue. For a long time I believed that excess profits could be realized in certain market categories, such as small cap equities and emerging foreign markets. I committed resources to many of these controversial theories.
Many of the resultant mutual funds delivered sub-par returns, especially when risk adjustments were made. It’s amazing just how many myths get exposed and exploded in the real marketplace. It turns out that many financial Gods have clay feet. I field tested no ideas that particularly excelled. Many of these concepts were okay in a sense that they produced market-like rewards. None delivered a king’s ransom.
The single biggest factor in managing a successful portfolio is time. Over decades, equities and bonds deliver generally reliable, predictable returns. The year-to-year surges are averaged away. The key is to assemble a portfolio that allows you to be patient enough to stay the course. Time in the marketplace is the essential secret; it’s as easy as that.
To stay the course you must be comfortable enough with your holdings to sleep peacefully every night. If you can’t, J.P. Morgan had a cure. He recommended that you should “sell down to the sleeping point”. I sleep well.
I choose not to reveal my current actively managed portfolio positions. I fear they may do the MFO community more harm than good. A proper portfolio is unique to an individual. However, be assured that my actively managed mutual funds are low cost with low turnover rates, and are captained by guys with many years of fund management experience. Historical data shows that these characteristics provide the best odds for better than average performance.
I wish you successful portfolio management control, profitable annual returns, and restful nights.
Best Wishes.

Reply to @Charles:
Hi Charles,
You are mostly correct in your assessment that I now favor Index-like investing.
I say mostly because our family portfolios are only partially committed to Index positions; we do have actively managed mutual fund holdings. To a limited and diminishing extent we still seek just a little Alpha, excess returns. That might well be a wealth robbing residual from my earlier investment lifecycle when I invested in a small group of individual stocks. I learn slowly.
When asked by younger folks with little savings, almost zero investment knowledge, and no time to devote to learning the rules and disciplines of the art, I invariably recommend a short list of Index products.
I never have shared the divergent incentives that The Street article identified as motivating financial advisors in the past. Since I have no such incentives, my positions on the matter are much more pure in many ways.
So I do acknowledge that I can be mostly counted among the ranks of those who advocate a passive Index investment philosophy.
Here is an incomplete list of a few distinguished investment wizards, top tier academic researchers and acclaimed financial writers who subscribe to that passive investment style: Warren Buffett, John Bogle, Bill Bernstein, Peter Bernstein, Scott Burns, Jason Zweig, Gene Fama, Jonathon Clements, Paul Samuelson. Burton Malkiel, Charles Schwab, Jeremy Siegel, Charles Ellis, and even the Motley Fools and the AAII organizations (partial endorsements).
That’s not bad company. A more inclusive list would be almost endless.
What are the primary drivers that solicit such an impressive cohort? It’s low cost. It’s low turnover. It’s owning the entire market. It’s the freedom of being able to participate in the markets without a huge time commitment. It is a time proven successful strategy.
The historical record is clear. When properly benchmarked, passive Index funds outperform their actively managed rivals roughly 67 % to 80 % of the time. Active fund managers have a difficult time recovering their cost hurdle handicap.
Additionally, numerous studies document that individual investors mostly underperform the funds they buy. DALBAR annual reports demonstrate that investors only gain a fraction of the yearly returns that their mutual funds deliver.
From a market timing perspective, we choose lousy exit and entry points. We chase hot funds and are typically late to the party. Behavioral research has identified a host of losing biases that damage our investment performance. I am as guilt as the next guy in that arena, perhaps even more so.
Especially for a novice investor, I often endorse Index investing. After 50 years of my own personal investing experiences, I too am incrementally increasing my passively managed holdings fraction. But I still own low cost, low turnover actively managed mutual fund products.
Hope springs eternal. The gambling excitement factor comes into play in my decision making process.
Best Wishes.

Love it.
Your first two takeaways, especially:

(1) Mutual fund survival is always an issue. In the Vanguard study about 34 % of the candidate funds did not survive the study period of about 11 years. That high a failure rate has always shocked me.
(2) Higher percentages of active share holdings do not immediately translate into positive Excess Returns. The returns spread among the high active share grouping is huge; it is just as likely to buy an inept active manager as a talented one.

And, I know...

Again, Performance persistency failed to be demonstrated. This finding is in line with other academic research that dates back to the 1960s.

But, admitting it is a little like admitting true love doesn't exist either =).
Thanks MJG.
PS. I started wading through some of the many good references provided in the article as well...
Carhart, Mark M., 1997. On Persistence in Mutual Fund Performance. Journal of Finance 52(1): 57–82.
Cremers, K.J. Martijn, and Antii Petajisto, 2009. How Active Is Your Fund Manager? A New Measure That Predicts Performance. Review of Financial Studies 22(9): 3329–65.
Davis, Joseph H., Glean Sheay, Yesim Tokat, and Nelson Wicas, 2007. Evaluating Small-Cap Active Funds. Valley Forge, Pa.: The Vanguard Group.
Ennis, Richard M., and Michael D. Sebastian, 2002. The Small-Cap Alpha Myth. Journal of Portfolio Management 28(3): 11−16.
Fama, Eugene F., and Kenneth R. French, 2010. Luck Versus Skill in the Cross-Section of Mutual Fund Returns. Journal of Finance 65(5): 1915–47.
Financial Research Corporation, 2002. Predicting Mutual Fund Performance II: After the Bear. Boston: Financial Research Corporation.
Grinold, R.C., 1989. The Fundamental Law of Active Management. Journal of Portfolio Management 15(3): 30–37.
Grinold, R.C., and R.N. Kahn, 1999. Active Portfolio Management: A Quantitative Approach to Providing Superior Returns and Controlling Risk. New York: McGraw-Hill.
Idzorek, Thomas M., and Fred Bertsch, 2004. The Style Drift Score. Journal of Portfolio Management (Fall): 76–83.
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Reply to @Investor: "The operative term is 'smart enough.'" Yup - says it all. Some pretty smart cookies here and I count you one of them. But, G** forbid everybody in the universe shared our enthusiasm and passion for matters financial. I'm afraid the world would be a pretty drab place.
Any market timing is fraught with peril (one reason for using target funds). And I'm not referencing big "buys" or "sales" based on the latest Iranian saber rattling or whether the fizz-cliff gets resolved by X date. These fits and spasms get way too much attention here and generally. However, there are extreme periods where adding a little extra to the "risk" mix might be prudent (as in early '09) and pulling a little off the table might be wise (as when the NASDAQ topped 5,000).

Dear friends,
We spent an hour on Tuesday, January 22, talking with Teresa Kong of Matthews Asia Strategic Income. The fund is about 14 months old, has about $40 million in assets, returned 13.6% in 2012 and 11.95% since launch (through Dec. 31, 2012).
Here's the offsite link to an .mp3 of the whole call: 78449.choruscall.com/dataconf/productusers/mfo/media/mfo130122.mp3
I'd be delighted to hear what other folks consider some of the highlights. My list includes:
1. this is designed to offer the highest risk-adjusted returns of any of the Matthews funds. In this case "risk-adjusted" is measured by the fund's Sharpe ratio. Since launch, its Sharpe ratio has been around 2.0 which would be hard for any fixed-income fund to maintain indefinitely. They've pretty comfortable that they can maintain a Sharpe of 1.0 or so.
2. the manager describes the US bond market, and most especially Treasuries, as offering "asymmetric risk" over the intermediate term. Translation: more downside risk than upside opportunity. She does not embrace the term "bubble" because that implies an explosive risk (i.e., "popping") where she imagines more like the slow leak of air out of a balloon. (Thanks for Joe N for raising the issue.)
3. given some value in having a fixed income component of one's portfolio, Asian fixed-income offers two unique advantages in uncertain times. First, the fundamentals of the Asian fixed-income market - measures of underlying economic growth, market evolution, ability to pay and so on - are very strong. Second, Asian markets have a low beta relative to US intermediate-term Treasuries. If, for example, the 5-year Treasury declines 1% in value, U.S. investment grade debt will decline 0.7%, the global aggregate index 0.5% and Asia fixed-income around 0.25%.
4. MAINX is one of the few funds to have positions in both dollar-denominated and local currency Asian debt (and, of course, equities as well). She argues that the dollar-denominated debt offers downside protection in the case of a market disruption since the panicked "flight to quality" tends to benefit Treasuries and linked instruments while local currency debt might have more upside in "normal" markets. (Jeff Wang's question, I believe.)
5. in equities, Matthews looks for stocks with "bond-like characteristics." They target markets where the dividend yield in the stock market exceeds the yield on local 10-year bonds. Taiwan is an example. Within such markets, they look for high yielding, low beta stocks and tend to initiate stock positions about one-third the size of their initial bond positions. A new bond might come in at 200 basis points while a new stock might be 75. (Thanks to Dean for raising the equities question and Charles for noticing the lack of countries such as Taiwan in the portfolio.)
6. most competitors don't have the depth of expertise necessary to maximize their returns in Asia. Returns are driven by three factors: currency, credit and interest rates. Each country has separate financial regimes. There is, as a result, a daunting lot to learn. That will lead most firms to simply focus on the largest markets and issuers. Matthews has a depth of expertise that allows them to do a better job of dissecting markets and of allocating resources to the most profitable part of the capital structure (for example, they're open to buying Taiwanese equity but find its debt market to be fundamentally unattractive). There was an interesting moment when Teresa, former head of BlackRock's emerging markets fixed-income operations, mused, "even a BlackRock, big as we were, I often felt we were a mile wide and [pause] ... not as deep as I would have preferred." The classic end of the phrase, of course, is "and an inch deep." That's significant since BlackRock has over 10,000 professionals and about $1.4 trillion in assets under management.
We'll work on an updated profile (written and audio) for February.
If other folks could offer either amendments or additions, I'd be grateful for your impressions.
As ever,
David

Ted and Pat. Thank you for the information about this area.
As remains, the "big houses" are still in charge of the risk to one and all.
Wonder whether the "FED/Treasury" and their super computers study the continued risks to the market place with all of the financial play toys that remain in place from those who really run the market place? 'Course the common folk would have to consider whether the central banks really care.
We small investors play with a most dangerous bunch.
Regards,
Catch

Private banks are stuffing structured products into client portfolios wherever the banks have discretionary authority to purchase these notes on behalf of clients – without explaining the risks and without obtaining specific client consent to these opaque, high risk, conflict-ridden investments.
If you’ve ever wondered how the major structured note issuers are able to move such massive amounts of highly-complex debt no customer could possibly understand, let alone ask for, now you have your answer. According to published reports, banks and Wall Street brokers sold more than $50 billion of structured products in 2010 alone. For the period January- November 2010, J.P. Morgan was rated as the fourth Top Seller in structured product retail sales, with $4.21 billion in sales and 9% market share.
My investigations nationally reveal that private banks today typically invest around 15% of client portfolios in structures issued, or underwritten, by the banks themselves.
Look to pay fees in excess of 2% to purchase and an additional 1% to exit these roach motels. Structured investments are not subject to any uniform standards and transparency as to pricing, valuation and fees is profoundly lacking.
Private bank clients aren’t clamoring for this junk. Most clients don’t even know what a structured product is, or that their assets are being invested in so-called structures. Holdings such as DB 95% PPN FX BASKET 1/25/13 LNKED or BARC 95% PPN EM FX BASKET 5/23/12 LNKE mysteriously appear on the account statements private banks provide to their clients. What client could make sense of those listings?
http://www.forbes.com/sites/edwardsiedle/2012/06/07/private-banks-stuff-structured-notes-into-discretionary-accounts-deny-fiduciary-responsibility/
Demonic Structured Notes Haunt Church Portfolios
Where a bank serves as trustee of an endowment or foundation portfolio, I have observed that structured notes issued or underwritten by the bank are most likely to be found in abundance. If the complexity and risk related to structured notes weren’t daunting enough, you’d think banks would consider conflicts of interest and self-dealing sufficient reason to avoid recommending them to fiduciary accounts. I can only conclude that the worldly profits derived from selling these products are compelling.
http://www.forbes.com/sites/edwardsiedle/2011/08/03/demonic-structured-notes-haunt-church-portfolios/
Forget investing, Wall Street is a marketing and sales machine. They’ve developed a real stinker of a product that at first glimpse appears like the answers to your prayers but really is just one more way Wall streets is going to separate you from your money.
http://www.forbes.com/sites/greatspeculations/2012/11/30/structured-notes-buyers-be-warned/
Wall Street banks have rightly earned a bad rep for their disreputable behavior. Attracting assets under management then proceeding to enrich themselves with client's capital at the client's expense, predators and their prey, seems endemic and systemic to the financial services industry, mutual fund complex included.

Howdy TNK,
You don't mention what % of your holdings are related to TGINX & DLTNX.
Do you have other bond funds and/or other mixed funds which may also hold various bond types?
We hold FNMIX, and although there has been recent weakness in the emerging markets bond sector; we find no reason at this time to move away from this area. As to the mortgage bond area involved with DLTNX. This area may remain weak and perhaps the majority move plays here have already taken place in 2011 and some of 2012.
Both of these funds pay a decent yield at this time and I personally don't see any large downside fires for either of these funds, at this time. TGINX was at its 52 week high on 12-26-12 and is down about .4% since then; with DLTNX at its 52 week high on 9-26-12 and is down about .6% since then. NOTE: % change in NAV only pricing.
As to bonds in general. There has been weakness in some investment grade areas starting in late July of 2012; which was followed by a small positive recovery period which found many IG bond areas to peak in price near the first week of Dec. 2012. General weakness and losses have been in place since, for some bond sectors.
As to technical factors for buying or selling bond funds; not unlike any other investment sector is a science of long time study; but which is not perfect for this house and must be factored with many other areas in the broad market place, which includes everything, but perhaps the kitchen sink. The below chart is for 200 business days and includes DLTNX, TGINX, BOND, HYG and BND. Keep in mind that the last two are more or less static, without active management. You will see that they all have taken their own pathways; and in particular since Aug of 2012, the BND which is a rather generic and tame bond representation. Money in BND and related types has done very little since Aug., 2012. And not that this should really mean much, in particular; but this action is just after Mr. Draghi of the Euro Central Bank stated that the bank would do whatever it takes to support euro area bonds and other financial problems there. Now, similar statements come and go; and especially during the past 4 years. His particular message had real teeth for traders or others, apparently. The point being with what you find on this chart, is that there are many paths for bonds. Lastly, if our house used only technical aspects; we should have not placed monies into PONDX, as this fund continues to defy the technical aspects of a "too hot to handle" proposition. However, the management of the fund continues to produce returns; and is flying in the face of many events; at least as of today.
Various bond sectors, April 1, 2012-Jan 17, 2013
This chart measures PONDX against some broad equity sectors back to April, 2012. Note: hover the pc mouse over any chart line for date references, etc.
The current equity market rally may be drawing away some monies from some bond areas; at least at this time.
'Course, thinking about selling a fund brings forth the "what to do with the proceeds?".
If you sold both of these bond funds, where would you place the monies?
This is only my opinion, for what it is worth; about your question.
Regards,
Catch

The Callan link is pretty interesting. It almost makes me wonder if there's not an element of randomness there... not with respect to why a particular sector did what it did in any given year (a read of the history of a particular year would probably give a pretty good idea of the "why", in hindsight) but rather the virtual impossibility of predicting what might happen in any particular future timeframe.
I think that the variables are so enormous that any attempt to "predict" more than a few weeks into the financial future just succumbs to the inherent noise. Maybe not true "randomness" as such in the financial future, but close enough to effectively operate as such.

Hi Guys
Callan Associates just published their annual update of the Callan Periodic Table of Returns (PTR). It now includes complete data for 2012. Their checkerboard color scheme allows for a quick assessment of market returns for an expanding list of investment categories.
The current release now incorporates 20 years worth of returns data for 9 investment categories. That’s a slight increase in data sets and longevity when contrasted against its first publication in this arena. For example, Callan now includes Emerging Market returns in their assembled data. Also, Callan has a publicity incentive to be the first among their competitors to update the market Tables. More power to them.
The Callan Link follows immediately:
http://www.callan.com/research/download/?file=periodic/free/655.pdf
It’s a standalone lesson by itself to scan the various asset categories, and see the up and down volatility in class reward ranking each year. Betting on last year’s winner is a loser’s game. Performance persistence is ephemeral. In many instances a top performer becomes the dregs of the earth the following year, and the reverse is equally likely. An investment category regression to the mean seems to be an empirical ironclad law. Trees do not grow to the sky.
The Periodic Table of Returns field is not solely occupied by Callan. Other investment houses offer both direct competing products and other versions of the Table that feature more focused data sets. I thought you might enjoy and will definitely benefit from exploring these alternate presentations. Most of the Links that I will reference have not yet made their 2012 returns data updates.
I personally treasure the Allianz Global Investors version that covers slightly different category groupings beyond the Callan work. For example, Allianz shows historic Real Estate performance; Real Estate holdings are part of my portfolio. Here is a Link to the Allianz product:
http://www.allianzinvestors.com/MarketingPrograms/External Documents/The_Importance_Of_Diversification_ACO33.pdf
Note that Allianz updates their PTR data sets more frequently (like quarterly) than their competitors do. Also Allianz incorporates a broader universe of investment classes within their presentation.
I feel we’re on a mission now. Here is a Link that summarizes Sector returns (from State Street Global Advisors) in the same format as the Callan presentation:
https://www.spdrs.com/library-content/public/US Sector Periodic Table of Returns 01.2012.pdf
Also, let’s explore commodity performance in the PTR spirit. Here is a functional Link to that somewhat dated data source from U.S. Global Investors:
http://www.usfunds.com/research/the-periodic-table-of-commodity-returns/
Tired yet? If so, you might forgo visiting the following Link (hosted by Boomerang Capital) that summarizes Hedge Fund rewards using the increasingly familiar PTR perspective:
http://boomcap.com/periodic/Periodic Table 2012-08.pdf
Plenty of style variety among slick Hedge Fund operators which generates a wide speculative performance record. And these data likely only reflect survivors and those who choose to report. Observe that this Hedge Fund summary is policy-wise updated on a monthly cycle, but, practically was last revised about 6 months ago.
I hope you examine these sundry data sources. They will serve to inform and guide your portfolio investment decisions. One caveat: I have only used Callan and Allianz regularly; therefore I can not vouch for the accuracy of several Links that I referenced.
Note the transient character of the returns and the instability within the dynamic rankings. Not much remains constant. Behavioral research scientists claim we are pattern seeking folks. Often we see patterns when none exist, which leads to bad decisions.
I suppose the good news here is that I do not see patterns within these referenced data sets. For me, they are a chaotic jumble without any plausible coherence. If you perceive a pattern within this enigmatic mess, “you’re a better man than I am, Gunga Din”. The other side of that coin is that you might be falling into the pattern recognition trap identified by the behavioral wiz-kids.
Convergent Wealth Advisors has a particularly attractive PTR presentation that provides a nice summary of asset class performance for 5-year, 10-year, 15-year, and 20-year measurement periods. The raw rankings might surprise or perhaps inspire you. Here is my final Link:
http://www.convergentwealth.com/sites/default/files/wp-content/uploads/2012/02/2011-Q4-CWA-Periodic-Table.pdf
These PTR surveys are addictive. I visit them several times every year. They might even prove to be helpful to everyone. I hope so.
Enjoy these numerous and informative PTRs. Many others with easy access that I have not mentioned in this posting are readily available to anyone inclined to search just a little.
There are not many verities that last in the investment universe. It is a dynamic world with a shortening time constant. I am astonished what incongruent interpretations are made of the PTR data sets. I have attended several investment seminars where the PTRs were used (falsely) to illustrate some fleeting momentum principle. In other workshops, they were used to backstop the need for diversity. I support this latter interpretation. Investing is often a wild ride with abrupt upsets, collisions, and detours. Diversification tames that ride.
Vigilance is the price of maintaining a portfolio. From the Bible, Prov 27:23, we read that “Riches can disappear fast. And the king's crown doesn't stay in his family forever-so watch your business interests closely. Know the state of your flocks and your herds”. That’s actionable lasting advice.
Wealth diversification is a subject the Bible addresses in several passages. For example, Solomon offered this advice in Ecclesiates 11:2 : “Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on earth”. So the Bible championed the need to diversify your wealth centuries before Baron Rothschild recommended that same commonsense strategy in his famous quote to divide your holdings into three major asset classes for both hard-time and uncertainty protection.
As a sidebar, a few financial advisors, with a strong religious-based belief system, justify and endorse the Lazy-Man portfolio array monitored by MarketWatch curmudgeon Paul Farrell by referencing Solomon’s 8-piece admonishment and caution. They equate the 8-biblical pieces to a portfolio assembled with 8 investment asset classes.
Actually, the numerous Lazy-Man portfolios have much more going for them (cost containment, long term commitment, world wide diversification, delivery of historic market returns) than a tenuous allusion to Solomon’s wisdom. An internationally diversified holdings set can cut overall portfolio volatility in half while retaining expected returns at a constant level. Although correlation coefficients are never perfectly zero or negative, and are never perfectly constant over time, they always contribute to a lowering of portfolio volatility. That’s in the direction of goodness.
I wish you all happy, trouble-free, and profitable investing.
Best Regards.