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I have been buying individual stocks both in taxable and retirement accounts for 30 years. I have been reading a book in the last week which is causing me to re-think my entire investing strategy. The book is "The Four Pillars of Investing" by William Bernstein. It is by far the most provocative book on individual finance I have ever read. Bernstein is an MD and PhD who is now an investment manager. His basic thesis is: You cannot beat the market, you can only hope to match the market. Yes you can beat it for a while but eventually over a lifetime you will regress to the mean. Your good years and bad years will even out and if you can match the market yourself buying and selling individual stocks or managed mutual funds you are lucky indeed. Does this sound like he is an advocate of indexing? The answer is a resounding yes and he presents extensive graphs and charts to prove his point. I might mention that this is not the first time I have read about indexing. Its just that Bernstein makes such a powerfull case for it. He likes the Wilshire 5000 index, the SP500 index, the short term index funds, the Morgan Stanley Bond Index, Growth Index funds, Value index funds, etc. Depending on your age, investment objective and ability to withstand risk he charts investing strategies for all. Its a very persuasive read and the reason why I'm raising it here in this forum is to see if any of you have read this book and if any of you are employing his strategies. As one might imagine he heavily leans toward Vanguard funds but is conversant of other companies as well. I suffered a loss of 63% in my relatively conservative portfolios from mid-2000 to October 2002. Since then I have recovered 43% which calculated another way means that I am now down only 50% from mid-2000. I am loath to jump in completely and I probably would not adopt his strategy in my taxable accounts because even with the recent bad market I have some long term capital gains that I really would not want to pay tax on. So I'm thinking of adopting his strategy for my and my wife's IRAs. As I cope with all this I would love to hear from those of you who are familiar with Bernstein or who have experience with indexing strategies.
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I have not read Bernstein's book but have read summaries and many have made reference to it as being outstanding. I am a proponent of index funds and Vanguard although I do own some individual stocks also, mainly because I don't want to have the capital gains at this time.
There is a whole lot of people out there which subscribe to the indexing approach if not completely to a sizeable portion of their portfolios.
A quick summary of why I think it is a valid approach can be found in The Arithmetic of Active Investing by William Sharpe at http://www.stanford.edu/~wfsharpe/art/active/active.htm .
For more on the subject you might want to look at the Fool Index Funds board at http://boards.fool.com/Messages.asp?mid=19658856&bid=100111 and its FAQ is you haven't already done so.
If this wets your appetite check out the Morningstar Vanguard Diehards forum at http://socialize.morningstar.com/NewSocialize/asp/AllConv.asp?forumId=F100000015 .
There are a number of books and internet sites that are deeply into indexing if you look around.

Bob
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THagenah

His basic thesis is: You cannot beat the market, you can only hope to match the market. Yes you can beat it for a while but eventually over a lifetime you will regress to the mean. Your good years and bad years will even out and if you can match the market yourself buying and selling individual stocks or managed mutual funds you are lucky indeed.

I would say if one subscribe's to the notion that success is mostly based on luck, then that individual should definitely be in index funds, if in the market at all.

If you were in Japan over the last 10 years and were indexing with their market, would you be happy with the results of that strategy? What if the US Markets mirror the Nikkei over the next 10 years? How do you know they won't?

I have not read this individual's book, but your synopsis smacks an awful lot of Efficient Market Theory (EMT) in its core.

There is an interesting thread on this topic here:
http://boards.fool.com/Message.asp?mid=19632157&sort=whole

I would hazard to say that Warren Buffet's average of about 24%/year over the last 35 years probably isn't all luck. And I would say that most people's investing time horizon is not much longer than 35 years of real investing, so I would consider this to qualify as a "lifetime" of investing experience. Where one can point to a concrete example that seems to bely the truth of a theory, perhaps there exist a lot more examples than just that one. I submit that there are a lot of folk out here who beat the market consistently, a lot of them post here on the Fool, but they (for many reasons) don't have the notoriety of a Warren Buffet, but still outperform regularly, just a lot more anonymously. Now, I can hear someone saying: "But not everyone can be a Warren Buffet", and that's true, but perhaps not germaine to the question of whether outperformance is possible.

Everyone has to develop their own style and their own comfort zone with risk and reward. For some, the answer is indeed indexing, for others it may be different.

For myself, there are so few companies whose financial situation I would want to own a part of that indexing (and being forced to own a piece of all of them) is not an option.

Good luck on your search for your investing comfort zone!

PosFCF
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THagenah wrote: "As I cope with all this I would love to hear from those of you who are familiar with Bernstein or who have experience with indexing strategies."

Many of us have read either the book you reference or its predecessor, "The Intelligent Asset Allocator;" many of us rely on index funds as the core of our investment portfolios; many of those are Vanguard index funds.

I think the important concept is allocating risks, especially among assets whose variability tend not to move together, and index funds do make such allocation easy. Of course, representation of particular markets is important as well.

db
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As I have stated before, indexing DOES offer advantages, but I like to diversify in all ways, including long, medium, and short term stock and fund ownership.

When you get older, like me, you also no longer have that loooong horizon ahead, either, so it sometimes pays to take advantage of ups and downs in the market AND in some individual stocks that are very obviously going to do well.

Vermonter
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THagenah:

Good points.

As you say, a lot depends on the individual investor's style, too. I enjoy "playing" some, and have the time to do that. However, not everyone has the time or interest in fiddling with investments, and it can be very tricky and dangerous to invest based on "hunches" or "tips"!!!

Vermonter
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Hey Vermonter, just entered the "retirement zone" myself and wonder about those "very obviously going to do well" stocks. Where and how do you find them? :-) I'm sure you're not claiming to have a crystal ball...

Not trying to be smarta.. just curious about your methodology.

Have a great one!
OTC
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Hi Curt:

Again, let me first say that I am NOT an expert, am NOT a pro, and I do okay but am NOT rich, so you see that I'm maybe no one to listen to!

"Very obviously going to do well" stocks? <s> I confess that WAS kind of a mouthful. I guess I meant some of the more "known" and established stocks that seem to just keep going, even if not "spectacularly".

Some that quickly come to mind in technology (my favorite fishing hole right now), for example, would be Dell and Intel, "biggies" in their arena. INTC was beaten down pretty badly a couple of years back, after I ("Mr. Oh-how-wise") bought some, when it was over $40!!! It plummeted (with most other tech stocks), so I stuck that in the safe deposit box and hoped to one day see it come back; now INTC seems to be chugging onward again, as I expected it would.

DELL was down, too, but seems to be coming back, and is, again, I think, the biggest in their arena.

I did not mean that there are any "definitely, for sure, never will go down again" stocks! <s>

For whatever it is worth, I try to have a mix of some mutual funds (some bond funds and equities, both domestic and foreign), plus some stocks I pick myself, ranging from a couple like these to a few "This looks promising; let's buy a few shares and see what happens" types. However, I NEVER stick a lot into any of those "iffy" ones, and even then I tend to research them first. Some do well, and I sell for a profit, and some turn out to be disasters and I lose.

Where to look?

Well, right here you can get some info, of course, and MF seems to me to be pretty solid and conservative. For some possible up and comers, though, I look at Yahoo's "In Play" for what looks hot on any given day; maybe E-Trade picks; my own Fidelity's comments; etc. Before really putting much into one, though, I go and try to dig into their financials, see if insiders are buying or selling, any hot news that looks to me as if it will spark a good pop, etc.

There are a lot of things I look at, and even my "gut", at times! I guess I can only suggest you stick your toe in carefully, don't get crazy, and maybe learn by doing -- with a few bucks you can afford to honestly lose!

Finally, my ideal situation is to see a stock that I have move up enough so I can put in a "stop limit" well below that current price, enough so that (dream of dreams!) I can arrange to sell HALF, at that worse-case stop limit, and recoup ALL that I put in when I bought ALL the shares! That would mean that, at worst, I'd get all my money back AND still have half of the shares as "gravy" no matter what!

No, that doesn't happen much, but it has happened, and, in fact, I have one stock right now in that situation. I hope it keeps growing.

Did I help or hurt? ;#)

Retired Vermonter
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Thanks for response Vermonter. I've been reading quite a bit, and haunting the Fool. Your response was just what I was looking for.

Thanks again.
OTC
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