Closing the barn door after the animals have escaped, methinks. Although it is unclear if Yahoo is cheap (it has potential, given its large user base, but it remains to be seen if the potential can be realized), the upside if Yahoo realizes its potential is very large, as was true for AOL years ago.It is true that Yahoo is not a Rule Maker. But the Rule Maker strategy is a complete failure - and has no real hope of ever beating the market. Companies that meet the Rule Maker criteria are big established growth companies, and everyone agrees their prospects are great - and so they are priced accordingly. The returns from the ones who live up to expectations will be offset by the 20%-40% who, over 5 years, encounter difficulties and their stock prices get crushed.You can only beat the market by doing something different from the market.
It is true that Yahoo is not a Rule Maker. But the Rule Maker strategy is a complete failure - and has no real hope of ever beating the market. Companies that meet the Rule Maker criteria are big established growth companies, and everyone agrees their prospects are great - and so they are priced accordingly. The returns from the ones who live up to expectations will be offset by the 20%-40% who, over 5 years, encounter difficulties and their stock prices get crushed.My first reaction to your "complete failure" statement was to scream "HERESY" at the top of my lungs (to the great consternation of my office-mates who thought I was working). But as I think about it ...Lately, hasn't TMF basically admitted that it has very little hope of beating the S&P500 by its mile-stone fifth birthday? Hasn't the RM portfolio guru-group recently admitted that its earlier poo-poo of any valuation analysis was a big mistake, by lately grafting a "2x5y" component onto its criteria? Don't I wish I'd thought about all this a little more critically before I plunked down good cash on TMF books, seminars, and the stocks that wisdom pointed toward? NO! NO! MUST STOP THINKING THIS WAY! MUST RESIST TEMPTATION!!! HERESY, HERESY, HERESY!!!!!!!!!!!!!!!(Seriously, in light of the last few months of articles from TMF, don't we ALL need to take some time to step back and think critically before going forward with the Rule Maker strategy, even as recently amended? We might have been right all along, but then again, we may just all be crazy. And it seems to me that the best and highest tenet in Fooldom is for each of us to do our own research, and take responsibility for our own decisions.)Thanks for a good post, banjo.LessTraveled
ANOTHER sale?? I have to laugh each time the Fool announces another sale. They stupidly watched AMZN, JDSU, EBAY, YHOO, CRA, etc. shoot up in price, never selling along the way. The Motley Fool did some good stock picking years ago, but what have they done lately? Nothing! They've bought a bunch of overpriced companies and never admitted their mistakes until too late. Hopefully they've learned from these HUGE mistakes and won't repeat them in the future.
Thanks for the compliment, Less Traveled.I have been around MF for many years (and was a volunteer in the AOL days). The MF philosophy is that it is possible for ordinary people, with real lives/jobs/families, to pick stocks instead of using mutual funds. However, with the exception of the RB portfolio, all of other portfolios that have appeared in MF have underperformed the market, some disastrously (including RM and Running with the Market). And the RB performance is somewhat distorted by buying AOL (who was MF's original partner) way back in 94 - that stock pick alone (I believe, I haven't crunched the numbers) accounts for much of the portfolio outperformance.If it is not possible for the MF's (who are doing this full-time) to pick stocks that beat the market, how can we expect to do so?Caveat: I love investing, and do have about half my portfolio in individual stocks. I believe that there *are* stock picking strategies that work, but that RM is not one of of them.Here is my philosophy:1) The market is more or less efficient - that means that for the most part, stocks are priced so that they reflect the prospects and risks of the company, and, on the average, one stock will return, over time, the same as another. Stocks with good prospects and low risk are expensive - priced high enough so that their returns will be average. Stocks with bad prospects and/or high risk will be cheap, priced low enough so that their returns are average.2) Any successful market-beating strategy must exploit some inefficiency, and I insist that I be able to explain to myself why that inefficiency exists and whether it is likely to persist before I try it.3) ANY stock-picking strategy has higher turnover than an index fund, which creates a substantial tax drag (except retirement accounts). So it is very difficult to outperform index funds, due to their tax-efficiency.The problem with RM is it picks well-known growth stocks with good prospects and low risk, which will be expensive. Even with a valuation criterion (which will help it), if 8 of 10 stocks meet the criterion, and 2 of 10 blow-up (and lose 3/4 of value), the returns will be little or no better than the market (that would give a 10.5% return if 8 double in 5 years, and the other 2 lose 75%).RB is much more likely to work, if you can identify companies with unique products or niches before anyone else - AOL, Iomega are great examples. It needs a sell discipline that allows it to sell stocks when they are dramatically overvalued and then, later, when they are mature and their pricing is efficient (e.g. AOL now). It can work because you are buying stocks based on beliefs about future prospects that are not reflected in the market price. If you are right, the stock increases dramatically - and the big winners (10-20x) more than make up for the losers. I believe value strategies work - buying stocks that are currently very much out of favor, where fear has driven down their prices irrationally. There is substantial academic evidence for these strategies, and for the underlying psychological mistake (projecting recent past too far into the future). It is unfortunate that MF has never had a value portfolio.I also believe momentum strategies work, though I do not use them myself. They work because when a company's prospects improve, there is a lot of skepticism at first, so that it takes a while (and a number of quarters of doing better than expected) before expectations and market price reflect the new reality. This accounts for the promise of many of the strategies explored here on the Mechanical Investing board.Don
I believe value strategies work - buying stocks that are currently very much out of favor, where fear has driven down their prices irrationally. There is substantial academic evidence for these strategies, and for the underlying psychological mistake (projecting recent past too far into the future). It is unfortunate that MF has never had a value portfolio.Look, you've obviously done a pretty fair amount of reading on the subject of investing, and perhaps particularly value investing. Being a little discouraged by the "proof in the pudding" for what I'm reading at TMF lately, I'm realizing I need to broaden my knowledge a long ways, as well. I don't suppose I could bribe you to post something of a bibliography of stuff you've read concerning your investment philosophies? I'm slowly acquiring (and more slowly reading) some the books TMF recommends, but I'd love to have a look at your library, as well.LessTraveled(P.S. About that bribe -- remember I'm licking a lot of retirement portfolio wounds, I have a kid about to go to college, and I'm thinking of taking up serious drinking as a hobby, so please don't make the bribe request too awfully high, OK?)
It's free - glad to help.On the value side, I'd recommend the best book nobody every heard of:The New Finance: The Case Against Efficient Marketsby Robert A. HaugenHaugen's a finance professor, who covers the academic research up to the mid-90s on value investing techniques, including their basis in research on psychological errors. Very convincing. Other books related to value investing:The Money Masters, by John Train (covers Buffett before he was well-known, Phil Fisher, and Templeton, among others)The New Money Masters, by John Train (not as good a book, covers some people I'm not too impressed by, like Jim Rogers, but also covers John Neff, one of the truly great value investors)If you decide you want to be a value investor, other useful reading includes Buffet's letters to shareholder of Berkshire (http://www.berkshirehathaway.com) and the quarterly reports of Marty Whitman at 3rd Avenue (http://www.mjwhitman.com/)For Asset Allocation issues (which should be the core of any investment approach), readAsset Allocation: Balancing Investment Risk, by Roger C. GibsonAlso, I love the book Capital Ideas by Peter L. Bernstein, which covers in a wonderfully readable book all of the key ideas of modern academic finance related to investing.In the same vein, look atClassics: An Investor's Anthology, by Charles D. EllisFor momentum investing, check out the Mechanical Investing boards and Foolish Workshop boards here (with their FAQs), also look at What Works on Wall Street and Invest Like the Best by James O'Shaugnessy. For growth stock investing, readCommon Stocks and Uncommon Profits, by Philip A. Fishervery old book, describing a very RuleBreaker kind of approach, which Fisher used very successfullyFinally: only read this stuff if you enjoy it. Since index funds do fine, and there's no guarantee that even if you put in a lot of work and thought you'll do better than you would have done with index funds, it's essential that you enjoy this stuff, else there's no point. No one is going to get rich by investing - we get rich by saving. We invest so our savings will grow - but the yearly additions are what feeds it.The only people who get rich from investing are the brokers and money management companies. Have you heard the old joke about the customer's yachts? Warren Buffett and George Soros both got rich by investing other peoples money, once they were rich they got super rich by investing their own.Don
Best Of |
Favorites & Replies |
Start a New Board |
My Fool |