Hi Vert,
Thank you for investing your valuable time to respond to my post. Alternate viewpoints are always welcomed, encouraged, and respected. It’s how a vibrant marketplace works its price discovery magic.
I have never met either Warren Buffett or Benjamin Graham. So my insights into their investment concepts come either from their personal writings, their direct quotes, and/or financial writers interpretations of their perceived wisdom. Certainly my own personal investing proclivities, education, and style influence the manner in which I translate and interpret these various sources. Others will surely internalize divergent takeaways from these same word sources.
I’m very happy that you took time to express your personal opinions. I suspect that you and I will never quite see eye-to-eye on this matter, but that's okay by any standards. Thirty years ago I was a solely active investor. Most recently I decided that passive Index investing offers the likelihood, never the guarantee, of superior portfolio rewards. Therefore, without completely abandoning active fund management, I decided to weight my portfolio much more heavily in the Index direction.
I admire the pugnaciousness and tenacity of active investors. With total disregard for their own efficiency, that cohort makes the overall marketplace a more efficient world with their constant trading. Passive investors gain the advantages of the efficient market without paying the casino croupier. I plan to take full advantage of this almost free lunch. I wish all these energetic active investors the best of luck.
I do insist that I reported the quotes from Mauboussin and Graham without either error or omission. I did not do selective pruning to distort or misrepresent their positions on these important matters.
I like Michael Mauboussin for his multi-discipline investment approach and his explanatory clarity. I do not see the verbal contradictions that you observed. To paraphrase, he said that by concentrating on good process, the likelihood of good results is improved, but without guarantees since outcomes are uncontrollable.
I do not doubt that self-generated contradictions exist. Over time, everyone makes statements that are not totally consistent. I surely do. Warren Buffett has and continues to do so. It is a human failing. I accept these minor inconsistencies and push ahead.
Speaking of Buffett, his current shareholders letter supports many of the insights referenced by Mauboussin and Graham as quoted in my initial posting. Here are two extended extractions from that shareholders letter as summarized in the Motley Fool website:
On the simplest, best investment strategy for individual investors: "My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I've laid out in my will. ... My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P
500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors -- whether pension funds, institutions or individuals -- who employ high-fee managers."
And,
On avoiding market (mis)timing: "The 'when' [of investing] is also important. The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur. (Remember the late Barton Biggs' observation: "A bull market is like sex. It feels best just before it ends.") The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never to sell when the news is bad and stocks are well off their highs. Following those rules, the 'know-nothing' investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results.”
This complete Motley Fool summary is titled “2
5 Must-Read Quotes from Buffett’s Letter to Shareholders” and is authored by Alex Dumortier. Here is the Link to the entire review:
http://www.fool.com/investing/general/2014/03/08/25-must-read-quotes-from-buffetts-letter-to-shareh.aspxThe investing principles advocated by both Benjamin Graham and his student Warren Buffett have certainly changed over time. Those changes are most likely the result of better informed marketplace participation groups (now mostly smart institutional investors). Although it is often credited to John Maynard Keynes, it is more likely that Professor Paul Samuelson said: “Well when events change, I change my mind. What do you do?”
The Graham extended quote that I referenced was just such a reevaluation of the investor environment and opportunities in the early 1970s. The job of identifying underpriced stocks was simply becoming harder.
I’m a bit bemused how your interpretation of that paragraph differs so dramatically from mine. You ignore the consistent thrust throughout the paragraph and glom onto the innocuous phrase “To that very limited extent" as a salient part that describes his mistrust of passive Index investing. I disagree.
That escape clause was added to simply acknowledge that some investors are superstars and do outperform market average returns. Certainly his students did for years, and when he made those comments, Graham was with a group of these investors. Graham was merely recognizing that the marketplace was more efficient and that finding exceptional undervalued stocks (his cigar butt one-puff theory) was probably beyond the capabilities of most, but not all, investors. This was an unexpected eureka moment in his life that must have shocked Buffett.
The fundamental meaning of the referenced paragraph is abundantly clear: excess returns are more difficult to find. It is definitely not an amateur’s (average investors) game.
I enjoyed your perspective on these topics and thank you again for your thoughtful contribution.
Best Wishes.
