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Author: fingfool Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 19348  
Subject: Investment Views And Strategies Date: 4/19/2000 5:57 PM
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Dear TMF Pixy:

I have studied with much interest the investment information, statistics and recommendations at the TMF Web site. TMF presents this information as well or better than other sources I have used.

Investment approaches and viewpoints by the participants of this forum can be deduced from some of the communications, but I would like to hear the views of you and others on some specific investment issues. If this is not appropriate for this forum or the issues (see below) have already been thoroughly covered but missed in my search, please let me know and/or guide me to the appropriate source. Below are my views and some specific questions that I would like to use to start an exchange - if it is deemed appropriate or of interest.

I do not see enough evidence of managed funds performing better than what would be predicted purely by chance. If there were money managers out there who could better the market, I believe I would not be able to pick them and that only a diminishing few, if any, managers can continue to outperform the market over 2 or 3 decades. I see much evidence for regression to the mean for fund performances. As a result, my investments are nearly all in index funds.

My views are:

I believe that fundamental analysis of individual companies can only predict performance into the near future. In my work experience I have found that the people leading companies can significantly influence their future direction and consequently their performance. A death of a CEO or other sudden changes in management, or management philosophy for that matter, are difficult to predict. In addition, fundamental analysis predicts several years into the future using recent past and current results that, I believe, can easily be overly optimistic in good times and just as pessimistic in bad times.

Since I invest only to maintain the wealth during retirement, leave something to the kids and not to get rich, I diversify to mitigate risk.

While I judge the investment markets to be efficient over the long haul, I also believe that bubbles in the market, caused by mass psychology, can develop over periods of as long as several years. My strategy is to buy and hold over long periods of time, but also to adjust equity/fixed income allotments in reaction to what I see as a bubble. I do not do this with the expectation of making a killing by timing the market exactly, but more as a defensive measure. I must admit that I am theleast comfortable with this part of my investment strategy.

My questions are:

1) Are the Foolish Four stocks part of an investment strategy or does this imply that a stock portfolio limited to four stocks is being recommended? If so what is the reasoning behind it?

2) Although the economy is showing good growth and there has apparently been a slight upward trend in equity returns over the past 70 years, can we seriously believe that 5 straight years of 20+ to 30+ % returns can continue into the near future? If we use historical data to plan and test our investment strategies, does not that imply that we accept regression to the mean of the stock market returns as a whole? If we are consistent in this, would not this imply that we would predict returns substantially below average sometime in the near future?

3) If we predict, as suggested by some market pundits, that prices will simply fall back to historic averages as the economy stabilizes or cools and than resume 20 and 30+ % returns when it spurts ahead again, does this imply that we have a paradigm now where the past data become irrelevant in predicting and planning? If so, with what would we replace it?

4) Using a combination of LT bonds rated from Aaa to Baa, I have calculated an average inflation adjusted return of 5.24% for the past 18 years with relatively small year to year variation. From statistical comparisons this variance is very significantly different (smaller) from the historical variance over the last 70 years. If we could count on 0 to near 0 inflation and a bond return of 5+%, would not that make retirement planning easier? While I see much discussion on SS from retirees, I see much less concern about inflation expressed. Have inflation concerns/effects been covered on the message board?

Regards,
fingfool




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