Weekend reading

Good reads from around the Web.

Regular readers will know I am that rare thing: a largely active investor who really should know better.

That’s why we have a big passive investing section here on Monevator, and why I suggest most readers direct most (or all) of their money towards passive portfolios.

That doesn’t mean I don’t think some individual investors – or fund managers, for that matter – won’t beat the market. In fact, I see no theoretical reason why some shouldn’t.

But that is a long way from saying I think you will, or that I will.

And it’s even further from saying that you can identify, in advance, a fund manager that can beat passive funds over the long-term – by a sufficient margin to pay for his or her costs, of course.

Just because something is possible – or even certain – doesn’t mean you should do it.

I guarantee you that someone will win the National Lottery tonight.

But I don’t think you should you put your life savings into lottery tickets.

Deconstructing Warren Buffett

Warren Buffett is one indisputable market beater, as far as I’m concerned.

Yet the lengths that some will go to in order to explain away his extraordinary success is, well, extraordinary.

Last week I included a link to an Economist article about some academic research that put Buffett’s out-performance mainly down to leverage (that is, cheap financing from Berkshire’s insurance float).

Never mind that Buffett was hammering the market for years before he had such leverage (in fact he was doing much better when he ran a smaller pool of money).

Like back-testers the world over, the wonks behind the paper didn’t let a little thing like dates and circumstances get in the way of their grand theory.

Anyway, I’ve now had a chance to read the full Yale paper, thanks to Monevator contributor The Analyst who sent over that link to the PDF.

In it the academics – with hindsight, obviously – apply half-a-dozen or so factors to Buffett’s results to ‘explain’ why he outperformed as a stock picker, on top of the gains he made by leveraging.

They even go so far as to create a synthetic Buffett screen, which they then apply back to several decades of market data, and say it would have done just as well as Buffett himself!

Newsflash: It’s not hard to see what someone has done, and then say that if anyone did it, they’d have got the same result.

To be fair, the academics several times that they consider Buffett’s talent to be exceptional – they point out that he executed their strategy 50 years before the academic underpinnings of their mimicking filters were widely accepted.

But that hasn’t stopped some pundits proclaiming that Buffett has been decoded, that you can replace him with a share screen, and that we might soon see ETFs that deliver what Berkshire did.

Which I think is a bit silly.

Buffett: Human, after all

If any active investor has an edge, then almost by definition it can’t be replaced with a screen or a mechanical strategy.

Even more importantly, Buffett himself was a living, breathing businessman who several times changed course as an investor over his six-decade long career. He went from Ben Graham ‘cigar butts’ to private companies to blue chip brands to buying mega-railroads.

Only this year he said he’d rather be buying residential real estate!

So I don’t think a mechanical ‘robo-Buffett’ would have a hope in hell of predicting what a real Buffett would do if he were to live to 140 and invest for another 60 years.

Unpicking Buffett’s edge as an academic activity is one thing – leaping to the conclusion that you can build and buy a Buffett ETF is quite another.

As for passive versus active, the man himself has said the average investor is best off in index funds.

So if you believe in Buffett, the most logical thing is to either buy shares in his company Berkshire Hathaway – or buy the market via a tracker.

Further reading

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

  • No behaviour gap? Dollar-cost averaging over-rated – Kitces
  • Richard Beddard reviews the Stockopedia screener – iii blog

Other articles

Product of the week: Hargreaves Lansdown is to offer up to a 0.5% a year loyalty bonus to SIPP clients. Many rivals already do, the FT reports.

Mainstream media money

Highlights from the wall of noise…

Passive investing

  • Interview: Vanguard on its index swap [Video]MorningStar
  • Race to cut ETF fees may leave investors in the dark – Reuters
  • Why are UK blue chips’ dividends delayed? – Munro Fund
  • 5 tips for fighting financial complexity – MorningStar
  • Passive funds continue to spank most active funds – Index Universe

Active investing

  • 25 years after Black Monday: Coping with volatility – Telegraph
  • Bullish outlook for gold – Telegraph

Other stuff worth reading

  • America’s jobs report: A gasp of life – The Economist
  • Digital currency: Brave new world or criminal haven? – BBC
  • True cost of going to university [Infographic]MoneySupermarket
  • US investors are still fleeing the stock market – Wall Street Journal
  • Men must act now to avoid gender-disadvantaged annuity rates – FT
  • Merryn: A brief history of hyperinflations – FT
  • The benefits of keeping your pension in cash – Telegraph
  • Castle Rock’s ‘mortgage revolution’ brings risks – Independent
  • Fox squirrels are long-term investors – Eureka Alert

Book of the week: There’s a new edition of The Permanent Portfolio out, and in both hardcover and Kindle formats you get a deep overview of Harry Brown’s investing strategy for all seasons. Permanent portfolio mania died down after gold stopped doubling, funnily enough, but still I think the approach is a valid one, and the core ideas are well worth thinking about. Note it’s a US publication, so some tax notes and similar won’t apply.

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Further reading:

  1. Weekend reading: Warren Buffett warns on bonds and gold
  2. Kraft’s sweet Cadbury deal is a bitter blow for would be British Buffetts
  3. Weekend reading: Over the top, again


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