"Money" Breaks Ranks

Research on Safe Withdrawal Rates

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hocus2004
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Post by hocus2004 »

I picked up this PDF link from the Berkshire-Hathaway board at Motley Fool. The focus here is not on investing strategies. It is a short bio of Benjamin Graham, with commentary on the development and influence of his ideas re security analysis: "An investment, he explained, was based on incisive, quanitative analysis."

http://bear.cba.ufl.edu/demiroglu/fin45 ... Graham.pdf
JWR1945
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Post by JWR1945 »

From Louis Lowenstein's Looking for Rational Investors in a Perfect Storm
For reasons that will be familiar by now, value investors are not remotely up to the task of keeping the market prices of $10 trillion or more of stocks in line with intrinsic values. Let me briefly summarize:
-not only do value investors account for but a small part of the market, but there are some almost perverse factors keeping them small. When value investing is in vogue, they are tempted to close a fund..
"for stocks that are priced too high, hedge funds may sell short, but mutual funds rarely do. Instead, many of them sit on their hands, holding a bundle of cash, as some are doing even now. Not much help for the market from here.
"for stocks that are priced too low " ah, now we're talking, but only if the market price is at a deep discount to the intrinsic value. This group is very, very picky...When economists speak of arbitraging price differentials, they are often referring to modest discounts that would not remotely tempt investors who have been disciplined to buy only when it's a very fat pitch. It's that margin of safety.
-ultimately, the problem is the snail's pace of their trading, only about one-sixth that of the average mutual fund. What the economic model requires is red-blooded activists, and these patient value investors operate on an altogether different tempo.
-to be sure, value fund managers need investors who share their investment philosophy..
..
Why the academic failure? Perhaps it's because the dramatic success of these value investors casts a long, very long, shadow on the notion of an efficient market and also on ancillary concepts such as the capital asset pricing model. Beyond that, however, these funds' performance can be measured, but their methods are highly qualitative and judgmental, focused as they are on the inherent uncertainties of business risk and value, not on readily quantifiable market data...Patience, investment philosophy, temperament - these do not lend themselves to the algebraic formulae and computer models that are so popular in the academy.

Will we have to wait another 20 years for a study of rational, value investing? Lynn Stout fears that our academic colleagues may now fall back on one of those tired cliches, such as that if you put 1,000 monkeys in front of a dart board, some random ten or twenty will hit the bullseye. Or they may say that five years are not enough. Or simply ignore this study, as happened to Buffett's? No single study is ever enough, but one of the attractions of the period 1999-2003 was the exquisite pressure on the Goldfarb Ten to abandon their value principles.
These are great insights. They make a lot of sense.

Have fun.

John R.
JWR1945
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Post by JWR1945 »

I am surprised to see that Ben Graham was an active trader.

On pages 9 and 10, notice that he always sold within 2 years. This is quite a contrast with many of his disciples.

Have fun.

John R.
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