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Top 3513. Dec 18, 2000 12:22 PM

» Kirk - Problem with QQQ

I just ran the numbers for my newsletter stock portfolio and it sure highlights why I don't buy QQQ for my personal or newsletter use.

QQQ is and was loaded with many over valued securities. Take a look at Cisco today for an example... or Sunw...

between 11/14/00 and 12/15/00 QQQ lost 12% and my newsletter stock portfolio ONLY lost 3-4% (rounding problem) I did at least 3 times better as I pay attention to valuation. remember I did 117% in 1999 so I beat the QQQ index in both directions.

People like Brinker that trade in securities that they think are over valued are playing with fire.

Much better to attempt to trade securities that you think are good valuations to begin with so if your trade is a bust, you just become a long term holder.

Perhaps I should market my newsletter to traders? 8)

Again, LONG TERM, this is probably a good price for QQQ for DCAing... short term, anything can happen.

-- posted by Kirk

Top 3514. Dec 18, 2000 12:34 PM

» Ronjamm - Re: recession

In response to message posted by Mark_J:
Mark,

Good post, I agree. We may retest 2500 tomorrow if the fed does not cut rates.

Kirk, no longer any need for the Mark J button.

-- posted by Ronjamm

Top 3515. Dec 18, 2000 1:28 PM

» nildesperandum - Re: recession

In response to message posted by Mark_J:

Mark J.

Thanks.
Appreciate your opinion on the subject/market situation.
Wolf

-- posted by nildesperandum

Top 3516. Dec 18, 2000 1:47 PM

» mvanderbilt - Re: Re: More Spook Stuff

In response to message posted by Kirk:

re Can I get you to post the best on this thread as it will get lost here in the playpen

Kirk, you're like the host at a party that keeps trying to shoo everyone out of the kitchen. I don't blame you but I hope you're not dissapointed when it doesn't work! This playpen is where a lot of the action is.

-- posted by mvanderbilt

Top 3517. Dec 18, 2000 2:01 PM

» DanG_6 - Re: More Spook Stuff

In response to message posted by DeepThroat:

Fascinating stuff, Deep Throat! My God, if the BIA (Brinker Intelligence Agency) ever gets their hands on that software and/or equipment that allows them to monitor our phone traffic and web pages, we are LOST!

-- posted by DanG_6

Top 3518. Dec 18, 2000 2:12 PM

» Will_L - Careful Dan

In response to message posted by DanG_6:

April is looming close and he's sounding like Moabo maybe getting further away. The BIA is watching you like a hawk--don't take any phone calls in March. Oh and watch the backyard for a black helicopter, I'll bet he has one. smile )

-- posted by Will_L

Top 3519. Dec 18, 2000 3:59 PM

» KLR - "Don't just do something. Stand there!"

"...But let me assure any investors who are participating that nobody but nobody, not Bogle and not Warren Buffett, whose forecast is about the same as mine, not anybody, knows where stock prices will be today, tomorrow, or a decade hence. And that is why I like the idea of very broad diversification and also recommend for virtually all investors significant asset allocation to bonds as well as stocks...."

-John Bogle- Monday, December 11, 2000

Sage Host: Please welcome John Bogle, founder of The Vanguard Group, Inc. For more information visit www.vanguard.com.

John Bogle: This has been a year that has been far more challenging than the experts thought it would be. The Nasdaq Composite Index [$COMPX] bubble has clearly burst, although interestingly enough, the New York Stock Exchange Index [$NYA.X] is actually up for the year. So it seems to me the most important lesson for equity owners in the year 2000 is the value of diversification. Don't try and guess between the "New Economy" and the "Old Economy," but own both and ignore the impossible task of timing between one and the other. I think if investors will heed that lesson, their long-term prosperity will be assured.

The Chat

Question: Do you have any words of encouragement for the investor that wants to focus on the long-term but is unnerved by the current volatile market environment?
As the year began, I looked out at the stock market and possible future returns over the next decade, and it seemed to me that continued prosperity was likely and investor returns –– earnings and dividends –– would continue to run in the 7 to 9 percent range. And I thought that speculative returns –– the price investor's pay for a dollar of earnings –– would reduce that investment return over time. Specifically, I thought the price-to-earnings (P/E) ratio might drop in the next decade from maybe 30 times earnings to 20 times earnings –– still a healthy figure –– which would reduce that investment return by about 4 percent a year to a total of say 5 percent. I said at that time that we shouldn't expect the 5. We shouldn't expect investors to reach 5 percent a year for each of the next 10 years because markets don't work that way. I thought a good bump, sooner rather than later, was likely followed by higher returns than the 5 percent market return I forecasted. And so far, it looks like a prediction that is not a bad one. But let me assure any investors who are participating that nobody but nobody, not Bogle and not Warren Buffett, whose forecast is about the same as mine, not anybody, knows where stock prices will be today, tomorrow, or a decade hence. And that is why I like the idea of very broad diversification and also recommend for virtually all investors significant asset allocation to bonds as well as stocks.

Question: Do you feel the corrections that occurred throughout this year have shaken out the excess overvaluations that have concerned you in the past?
I think the correction has certainly shaken out a lot of overvaluation in the Nasdaq [$COMPX]. As I look at the difficulties that many of the technology stocks in the Nasdaq [have] in generating future earnings, or even predicting future earnings, I am not at all sure that there isn't more decline to come. But again, that's in the nature of a caution, not a recommendation to sell stocks, because the truth is, none of us are smart enough to know when the day to sell is here. So it's best to invest in a very diversified portfolio, I repeat, and stay the course to the long run. Put another way, I like the idea of capitalizing on the productive economics of investing and minimizing the counterproductive emotions of investing.

Question: Although political uncertainty and lack of a presidential election resolution have in part been responsible for current market turmoil, over time, does it really matter which party is in the Oval Office?
I don't think it matters very much, and I don't think the political turmoil is significant to investors. Critical though it may be, we are speculators. There is an interesting fact that our economy has grown at about a 50 percent higher rate under Democratic presidents and our stock market has also generated returns again about half as high as under Republican presidents. So if you believe the market is an actuarial table, you ought to be rooting for Al Gore. I don't believe the market is an actuarial table.

Question: Why do you feel the Wilshire 5000 Total Stock Market Index [$TMW.X] is a better long term core investment than the Standard & Poor's (S&P) 500 Index [$INX]?
Well, first I want to be very clear that the difference is very, very small. The long run of the two indexes have been virtually identical because the Standard & Poor's Index represents about 75 percent of the value of the Wilshire 5000 index. The reason I favor the former, however, is that it includes mid cap and small cap stocks and thus insures a full participation in the entire U.S. stock market. The differences will be small from one year to another, but the theory of indexing and the practice of indexing suggests that the best way to be sure to earn an investment return larger than the return earned by all investors as a group is to own the entire stock market at the minimum cost. And that's what the Total Stock Market Index accomplishes.

Question: Hasn't technological innovation continually enhanced the economic productivity of companies so that perhaps the technology sector deserves a premium valuation relative to the market?
The answer to that is yes. Quite clearly it is true. The question is how much premium, and right now the technology sector commands probably a 200 percent premium over the rest of the market. The P/E ratio on the technology-driven Nasdaq [$COMPX] remains over 100 times. I am reminded of the wisdom of the old saying, "It's fine for stock prices to discount the future, but it's very risky when they start to discount the hereafter." So I think the premium is likely too high. The technology premium is too high. If I were a betting man, I would continue to bet on value over growth. But I want to be very clear on this point: I am not a betting man.

Question: Can enhanced index funds that seek to return 1.5 to 2 times the returns of the underlying benchmark index on which they are based be worthwhile long-term investments?
As the question is put, it is absolutely inconceivable. No one enhanced index fund, in my judgment, can possibly double the return of the stock market. Vanguard 14 years ago founded one of the best performing enhanced index funds (Vanguard Quantitative Portfolios, now known as Vanguard Growth & Income [VQNPX]) and it has beaten its target S&P 500 Index by about 16 basis points per year. I consider that a remarkable accomplishment. NOTE: For taxable accounts, extra taxes would have more than used up that premium.

Question: Fourth quarter earnings growth for the S&P 500 Index [$INX] was estimated to be 16.8 percent back on July 1. And since December 8th, those estimates have been slashed to 8.4 percent. What catalysts caused earnings growth to deteriorate so rapidly of late?
Corporations, particularly on the technology side, have had great difficulty getting price increases. Computer sales have slowed down markedly, business conditions are easing, and many of the Internet companies are finding that revenues are simply not there for them and are actually going out of business. The competition is a powerful part of capitalism. That means it is very difficult to sustain extraordinary earnings growth, both for the economy as a whole and for individual competitive businesses. I also believe we will see a significant slowing in the productivity numbers as time goes on.

Question: Does it appear as if value investing may outperform growth investing for some time?
I think that is a good bet. But it's a bet. Never forget when you make a commitment of value or to growth, it's not enough to think about that commitment. You have to think about what it will take to reverse it. Will value do better than growth? That's a hard question to be sure of the answer to. And if it is for a while, what do you do when its time for growth stocks? How will you know when that time comes? Being right twice and then twice again and then twice again maybe a dozen times in an investment lifetime of say 70 years, is impossible for anyone to do. So don't guess and don't bet.

Question: You suggested that the annualized returns for the overall market will be somewhat mitigated over the next several years as in the 1990s when the returns were too excessive. What type of annualized average returns do you feel are more realistic over the next decade?
Over the next decade, as I should make very clear, I am looking for an investment return of about 9 percent –– a dividend yield beginning with 1 percent with possible, although optimistic, earnings growth of 8 percent. That's an investment return of 9 percent. But if the P/E ratio drops to 20 times–– reasonably likely in my view, and maybe lower –– that would reduce that return by 4 percentage points per year. Thus, the total return, including the investment return and the speculative return, would be about 5 percent. There's not much point in being precise in these numbers because nobody can forecast the speculative return, which will depend on investors' emotions at the end of the decade. What price will investors pay for the earnings of 2010 or 2011? How does anybody know that? The point is that I think we should be prepared for a sustained period of far lower returns than the 18 percent return that the market has provided in this bull market that has gone on for 18 years.

Question: Do new mutual fund-like investments such as Exchange Traded Funds, or ETFs, and the personalized baskets of stocks such as FOLIOfn or Netfolio really add any value to the individual investor, or are they mainly just marketing tools to capture investor assets?
The answer to that, sadly, is at least the ETFs are simply new tools to capture investors' assets, specifically to bring speculators into the index funds rather than long-term investors. The folio is a little bit different and I think can be useful to investors, but I fear is used more by traders than long-term investors. In my opinion, the secret of investment success lies in establishing an enormously broad portfolio, either an index fund or something quite comparable, minimizing investment cost and keeping turnover at the lowest possible level. "Don't just do something. Stand there!" The record of the last 50 years bears out the wisdom of that infinitely simple strategy.

Closing Remarks

Sage Host: Thank you for joining us today, Mr. Bogle! We appreciate your insights!
It has been enjoyable to work with Sage on this interview, and I hope that these thoughts, which will not surprise those who have read my new book, will find them helpful.

* * *

-- posted by KLR

Top 3520. Dec 18, 2000 6:14 PM

» Rande - Re: "Don't just do something. Stand there!"

In response to message posted by KLR:

KLR,

Thanks for the great post. Can't pass up the opportunity to post my favorite Bogle quote:

The idea that a bell rings to signal when investors should get into or out of the stock market is simply not credible. After nearly fifty years in this business, I do not know of anybody who has done it successfully and consistently. I don't even know anybody who knows anybody who has done it successfully and consistently. Yet market timing appears to be increasingly embraced by mutual fund investors and the professional managers of fund portfolios alike.

John C. Bogle in "Common Sense on Mutual Funds"

And, speaking of favorite quotes....

Speculation: The activity of forecasting the psychology of the market. Speculative motive: The object of securing profit from knowing better than the market what the future will bring forth. [John Maynard Keynes, "The General Theory of Employment, Interest, and Money"]

There's something in people, you might even call it a little bit of a gambling instinct . . . I tell people [investing] should be dull. It shouldn't be exciting. Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas. [Paul Samuelson, "The Ultimate Guide to Indexing"]

....there are confident ones; they move from ninety-ten in stocks-bonds to five-ninety-five in stocks-bonds. That implies a degree of self-confidence bordering on hubris and self-deception. Over the decades, when both groups...have equal limited (!) ability to "time," the cautious chaps who alternate between sixty-five-thirty-five in stocks-bonds and sixty-forty are likely to end up with a superior risk-corrected total return score. [Paul Samuelson, "Journal of Portfolio Managment," Fall 1994]

-- posted by Rande

Top 3521. Dec 18, 2000 6:23 PM

» jbrady - Re: Re: Where's The Beef??

In response to message posted by Fahrenheit451:

Fahrenheit451, "brinker called it", what about the call to re enter at 83? All he had to do was say nothing, you can't take his call to re enter back, he did it.

jim

-- posted by jbrady