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Author: LTInvestorJim Big red star, 1000 posts Ticker Guide Global Fool SC1 Blue Captain Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5162  
Subject: Re: My experience with GG stocks and indices Date: 4/19/2012 1:51 PM
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Anurag --

Thank you for taking the time to post so much information on your experience with VWO. It obviously took you a lot of time to compile that information, and it makes for a good discussion.

I don't really know what you mean by "monthly average return." What GG reports is "total average return." They calculate the total return for each of their recommendations to date and average them.

Whether that is the best way to report performance is something that has been debated over and over again on the boards, but one thing is clear: it really does not reflect any real portfolio performance. It isn't even annualized. But MF does it this way because GG is an idea service, not a portfolio management service. So the performance numbers are just a figure of merit on their ideas. So it's not a direct comparison with fund performance calculations, and I don't think your "10.1% vs. 9.4%" is really comparing apples to apples.

VWO had a great year in 2009, gaining 75%, but even that put it only in the 38th percentile of emerging market funds. Since then, they haven't done so well, never really getting above the average performance for their peer group, and significantly underperforming in 2011, when they lost 18%.

VWO has very low expenses (being a Vanguard product), which is a great thing for passive investing. But it's also important to realize the composition of the fund. They are very heavily weighted toward large cap stocks, with the median market cap of their holdings being $17B. They are also strongly weighted toward the financial sector, with 23% of their portfolio invested in financial services companies. None of this is necessarily bad, but people should realize they in owning VWO, they are getting very little exposure to small caps, and the performance in the future will be closely tied to the financial sector. It explains why they did badly in 2011 when there was so much worry over European debt, and why they rebounded so strongly coming out of the financial crisis of 2008-2009. If you believe the Euro crisis is going to get solved, VWO might be a good bet. If you believe that it's going to get worse...well, you decide.

In any case, much of the performance differences you see between an index ETF and GG, even if you came up with a valid way to compare, depends mostly on differences in sector, capitalization, and geography. It's not so much about the quality of the stock picks in GG, in my opinion. GG tries to spread out their bets more than what you will see in an ETF like VWO. But I know others might reach a different conclusion. Your own portfolio performance will depend on the timing of when you put funds in (wasn't March, 2009 great?) and what subset of GG recs you choose.

I do believe that passive investing approaches like ETFs can play an important role in portfolios, particularly for:

* people who don't have the time or temperament to pick individual stocks,

* people (like my investment advisor) who think it's impossible to beat the market over the long run by picking stocks,

* or, people who just want to supplement their portfolio with a more diversified holding.

Personally, I'm biased toward analyzing businesses and taking ownership in them. I was in VWO at one point, but I couldn't identify the "value points" so I didn't know when to add. That was because I was trying to apply my stock-picking mentality to a completely different sort of instrument. It didn't work for me, but I think it works for a lot of other people.

And I don't think that any of the backwards-looking data is going to predict anything about returns for the different approaches going forward. The market is changing all the time. I think the approach one chooses needs to be matched to one's temperament and portfolio management policy. I have no doubt you will do fine with a disciplined approach to investing in VWO over the long term. I also think that it's impossible to say whether you will do better or worse than if you put that money into carefully selected GG stocks. You just need to pick an approach you're comfortable with.

Jim
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