Why Most Investment Systems Simply Won’t Work

by Alexander Green, Advisory Panelist Wednesday, August 12, 2009: Issue #1064

Early in my 16-year career on Wall Street, I made an astonishing discovery: The overwhelming majority of my colleagues – bright, educated, experienced, and articulate – didn’t have the foggiest idea what they were talking about.

This only became obvious in retrospect, when I saw how their carefully constructed financial theories and investment forecasts turned to dust rather than generating any significant profits.

(You’d be surprised to learn, for example, how many investment “pros” lose a substantial percentage of their own money in the market each year.)

The truth is that there are virtually limitless ways to take a beating in stocks – and only a few methods that work well over time. These methods are generally codified into widely accepted investment principles,

In this video interview with IndexUniverse's Jim Wiandt, Vanguard founder John Bogle takes on everything from the so-called death of buy-and-hold investing to the wisdom of buying index-based commodity funds.

There has been a lot of chatter lately—since John Bogle dropped his "investors are getting fleeced in ETFs" bomb two weeks ago—that the average Joe just isn't going to do very well in ETFs because he'll be getting in when he should get out, and vice versa.

Well, let's see how the "average" ETF investor did in the month of June. We don't have numbers on how asset flows changed during the last 30 days yet, although our friends at the National Stock Exchange are sure to get us that soon. But what we do know is the bets investors, as a mass of men and women leading lives of quiet desperation, made at the beginning of the month.

As a refresher, here were the assets of leading ETFs at the end of May (in billions of dollars):

The full transcript of John Bogle’s recent webinar examining exchange-traded funds and the outlook for America’s investors.

As part of the festivities surrounding the 2009 Journal of Indexes editorial board meeting, IndexUniverse.com hosted a live webinar with Vanguard founder and index industry legend John Bogle.

During the one-hour presentation, Mr. Bogle unveiled new research regarding how successful (or not) investors are when trading exchange-traded funds, and took a big picture look at the state of American finance.

Moderated by JoI editor and IndexUniverse.com publisher Jim Wiandt, the webinar features an extensive audience Q&A session. A full transcript follows below.

Jim Wiandt, editor, Journal of Indexes (Wiandt): Good morning everyone, and welcome to a very special event that we have here today. We are actually at the NASDAQ market site and we have the Journal of Indexes editorial board meeting today.

We have

It was an extremely interesting Journal of Indexes board meeting, but two things stand out.

For those of you who missed it, we’ve posted an array of comments and photos from Wednesday’s Journal of Indexes board meeting. Although the proceedings may have been dominated by John Bogle’s frontal attack on ETFs, a couple of other issues really stood out for me from the day.

First let’s quickly discuss the Bogle data. Jim Ross from State Street Global Advisors I think provided the most eloquent rebuttal to the data. Ross argued that the turnover numbers and holding periods implicit in Bogle’s data are a distortion, owing to the fact that you have large institutional investors and hedge funds doing myriad things with ETFs. These investors may appear to be long the funds, but may have their positions wholly hedged; they may also be short the fund (which requires the creation of

Vanguard founder and index industry legend John Bogle presents new data showing that investors generally make poor trading decisions when buying and selling ETFs. This one-hour webinar, moderated by Journal of Indexes editor Jim Wiandt, also features a lengthy audience Q&A covering everything from index funds to Bogle’s life work to the future of the financial system in the United States.

Click here to view a full replay of the webinar.

Click here to view Bogle’s slides in PDF format.

Click here for a transcript of the presentation (coming soon).

Click here for IndexUniverse.com’s coverage of Bogle’s research.

BULL - June 1: Deutsche Bank US equity analyst Binky Chadha forecasts S&P 500 at 1060 by 2009 year-end, citing improving corporate profit margins.  He said aggregate profit margins for S&P 500 “remains well below the average of the last few years, implying considerable potential upside over the medium term.”

BULL - June 1: JP Morgan Chase analyst Thomas Lee forecasts 2009 year-end S&P 500 index at 1100.

BULL - June 1: Bank of America/Merrill Lynch analyst David Bianco forecasts 2009 year-end S&P 500 index at 1100.

BEAR - May 30: Morgan Stanley equity analyst Jason Todd says sell this S&P 500 rally. He says Morgan Stanley does not see large upside above 825-850.  He said,  “In the rush to buy a cyclical recovery, it seems earnings or valuation no longer matters. We would be comfortable with this view if the earnings trough was closer, but it is not.”

BEAR - MAY 28: Berkshire

Reports surfaced Sunday in London that the biggest U.S.-based index mutual fund company is tossing its hat into the ring to purchase the leading sponsor of exchange-traded funds.

The Sunday Telegraph is reporting that the Vanguard Group, which virtually created the modern indexing marketplace for individual investors, has made a bid in the neighborhood of $5 billion to buy Barclays Global Investors’ iShares business.

The combination would create an ETF industry juggernaut with some $311.9 billion in total assets. Such a figure is based on estimated ETF asset levels for both Vanguard and BGI’s iShares lineup at the end of April. It would easily bolt Vanguard, now No. 3, past current No. 2 State Street Global Advisors.

Perhaps more importantly, such a huge combined war chest would represent more than half of the U.S. ETF market’s total asset level of $535.3 billion, according

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The following are some interesting articles I have read over the past few days that readers may also like to have a look at:

• John Bogle (The Wall Street Journal): A crisis of ethic proportions, April 20, 2009. We must establish a “fiduciary society”.

• Martin Wolf (Financial Times): Why the “green shoots” of recovery could yet wither, April 21, 2009. Is the worst behind us? In a word, no. The rate of economic decline is decelerating. But it is too soon even to be sure of a turnaround, let alone a return to rapid growth. These are still early days.

• Mohamed El-Erian (Financial Times): Bank tests we should get stressed about, April 21, 2009. The aim is to ensure global consistency in banking that also clarifies accountability and responsibility.

• Simon Johnson (The

As stock markets attempt to notch up a sixth consecutive week of gains, the debate as to the longevity of the nascent rally rages on. The featured video material sees Steve Leuthold stating that the S&P 500 Index will rise to 1,100 this year, but Laslo Birinyi taking a bearish stance and advising that the “odds are not with you”. Similarly, Jim Rogers expects more “bottoms”, Nouriel Roubini claims markets to be “way too optimistic” and acclaimed Cazenove chartist Robin Griffiths is looking for a retest of the March 9 lows.

As far as the economic outlook is concerned, Martin Feldstain refers to the “faux recovery”, whereas Wilbur Ross and Abby Cohen comment on the slowdown in the econimic deterioration. Adding to the economic debate and related issues such as bank stress tests, the blame game, Goldman Sachs and commercial real estate, this week’s harvest