The other day I made a reference to Robby Gordon racing in the 2011 Dakar Rally with the same two wheel drive Hummer H3 that he drives in the race every year. I noted there must be an investing analogy there somewhere and maybe I figured it out.The first picture is of the Hummer in a place where it shouldn't be stuck on top of an enormous rock. The second picture down below is a closeup of the front end of the Hummer on the rock. Other than the money he must get, I said I don't know why he drives this vehicle in the event every year.
I am clearly no expert but this seems like the wrong tool for the circumstance faced. In investing there are tools at our disposal for the circumstance faced, choose the correct tool and your chance of success increases, choose the wrong tool and your chance of success decreases. Selecting the correct tools is a top down decision that comes with understanding the big macro picture. Key to this point is time spent and having some introspection that your general beliefs may be incorrect.
For many years the wrong tools have been broad based index funds. I've been making this point ever since I started this site and I believe it will continue to be the case for many years to come. The logic in 2004 for this point was the US as a less compelling investment destination, Europe flat out stinking and Japan nowhere close to having things figured out and I don't think this has changed. If these things have indeed not changed then broad based index funds will continue to be the wrong tool.
Interestingly I used to get a lot more push back on the idea that broad based index funds are the wrong way to go which either means the broad based index crowd is getting smaller or they have collectively stopped reading my stuff.The other day I mentioned a conference call for planning the sector ETF panel at the Inside ETF Conference next month. In our discussion the moderator asked for our take on the extent to which most advisors use sector ETFs although I think the implication was narrow funds, not just sector funds. I think there was of sort of consensus that most advisors do use sector funds but I disagreed. Using broad based funds is easy to do, doesn't require a whole lot of work and should not do much worse than the market which is a defensible position.
A long time ago I was an institutional equity trader. One of my colleagues left to start her own advisory firm planning to use actively managed mutual funds, make the occasional change in holdings and she was convinced that this would not blow anyone up. She felt this would be a fine living. I found out second hand that the tech wreck crushed her client accounts. I have no idea if it put her out of business or not but this serves as another example of wrong tool for the circumstance. Actively managed mutual funds with broad mandates often fall into the same problem as broad based index funds as managers tend to follow the market--how many actively managed funds got caught with too much tech ten years ago?
Success, however you define it, requires adapting to the current environment not relying on the same thing for every environment. I am certain there is a race where a two wheel drive Hummer is the best vehicle but that race is not the Dakar. By the way Gordon didn't finish day four of this year's race.
6 comments:
Morning, Roger.
I'm not an indexer, but I do believe that a properly diversified basket of indexed etfs is the smart choice for those with little interest or time to spend on investing. You're right about the mandates of broad equity mutual funds, and the costs of active management can be a drag as well.
Thanks for the photos. I wish I could get that channel.
Roger,
It is not that people do not disagree with you on the utility of broad based funds it is that you continuously disagree so what is the point.
Where we have agreed in process is emphasizing foreign and using some form of market timing. I use broad based funds, have emphasized foreign more than you, and use something other than the 200 dma to initiate buying equities or going market neutral.
from 2002 to 2010 using broad based funds my rate of return has been 15.3%
I think broad based funds are far superior for the small investor even though I see no reason why professionals would be harmed by using sector funds.
I believe the majority of both your and my return beating the market is due to avoiding the brunt of bear markets and emphasizing foreign. Sector vs broad based is most likely not even a secondary factor in your success but most likely a tertiary factor in your success.
That said I do find your process to be successful which is why I read your blog even if I do not always agree with you.
Hi Roger, you got me thinking; I've been reducing my exposure to funds that specialise in commodity producing companies - recently offloading some and and putting the cash into emerging country funds. I realised owning several commodity ETFs and commodity-related funds, plus emerging market funds that fuel those commodity producing countries with demand could leave me in rather a tight spot if the SHTF with EM (no guesses as to what could happen).
I think I had all my eggs in the metaphorical basket there, so lightened up on that sector and I'm thinking I should choose to add to other sectors. Or maybe choose a global fund? I'm very light on US funds so I could add there. I'm thinking there may be a pull back early this year so am waiting for some heat to come out of the markets. Then again, so is the world and his wife so it probably won't happen.
Decisions, decisions.
Four wheel drive is great. You can get stuck in places you can't even get to with two wheel drive.
Speaking of things that appear to be working, this from Forbes at http://tinyurl.com/287s9mj caught my eye: Small businesses aren't waiting for any future mandates because the tax credit in the health reform act gives them incentive to add additional employee health coverage now and (surprise, surprise) that's exactly what they seem to be doing.
Agree with fboness: 4wd can dig four holes instead of two and often does so in places were no one can find you but don't get a 2wd in the Dakar either.
The only sensible explanation for a front wheel drive hummer is either the suspension is real good and they don't want to modify it to incorporate a 4x4 solution or the costs to carry front differentials around in lorries is too expensive. Otherwise, I agree, it does not make any sense to see a car like that struggling to circumvent even the easiest of the corners which bikes and 4x4 do like a breeze. No wonder the pilot crashes. He is probably one of the better ones, with the worst tool for the job. Bless him.
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