Comments on: The Past Predicts the Future

By: Dean Morel

Dean Morel — Thu, 13 May 2010 12:40:15 +0000

Hi Jeff, I did mean Berkowitz as in Bruce Berkowitz from Fairholme.

By: jeff

jeff — Thu, 13 May 2010 10:01:20 +0000

BTW do you mean markowitz? – berkowitz was the psychopath wasn’t he?

re MVA optimisation, it is useful as a maths proof of the concept of diversification. it is also useful for investment consultants to imply a level of precision that does not exist. as nobody can accurately estimate any of the inputs and the output is highly sensitive to the inputs it shouldn’t be considered a useful practical tool.

you might also like to read this -
http://online.wsj.com/article/SB123093692433550093.html

By: jeff

jeff — Thu, 13 May 2010 09:49:07 +0000

Dean and Sean thanks very much for link to the PER data site. Great effort by Colin to maintain it.

Its scary how much different PER data sources vary.

By: Sean

Sean — Thu, 18 Mar 2010 10:29:24 +0000

Hi Dean, your site is an excellent read, so keep it up. Thank you for putting in the effort for what is arguably one of the best sites in Australia on investing.

I guess we have differences in our investing so it is interesting to see the way they both work. I guess your way is by concentrating on firm specific risk with an edge. For me I tend to concentrate on market timing the index. I use the index to diversify firm specific risk so I can take a large market position. The academic research would indicate that neither of our strategies could work over the long term. Which is interesting but academic (unless it turns out to be true!).

With the course, I think you will learn some useful things. I think you may enjoy the corporate finance subject more than the others.

By: Dean Morel

Dean Morel — Tue, 16 Mar 2010 12:05:41 +0000

Sean, is there a need to reconcile theory with practical proof? Buffett (two t’s), Berkowitz and others who invest for a living show how it should be done. Reward is gained from firm specific risk. Diversification can at best result in market performance. Yes, I will have to bite my tongue and regurgitate CAPM and EPH, but I’m hoping I learn something of value from it. Few theories stand the test of time, that’s why I say do what works for you. The most important thing I want anyone reading this site to come away with is that the key to investing is knowing yourself and finding what works for you. There are many paths and many theories, but knowing what works for you is the key.

So I guess I found that link frustrating, as it was taking a theory and trying to apply it without regard to the individual. I give that approach to investing minuscule chance of outperforming.

By the way, thanks for you interesting discussion. Over three hundred unique people visit this site everyday and you’re one of the few who takes the time to comment. Thank You.

By: Sean

Sean — Tue, 16 Mar 2010 09:47:02 +0000

I agree it would be much easier to buy into a mutual fund like vanguard in a balanced or growth portfolio. What I found interesting was that he was actually trying to implement CAPM and the Markowitz optimisation. I thought it was interesting to see someone go from first principles, which is what you do in a course (CAPM models) to discovering the optimisation from recent actual data, trying to figure a point on the efficient frontier and calculating drawdowns on the portfolio.

One powerful idea is that that you gain no extra reward from firm specific risk but a free kick from diversification. How you reconcile that with Buffet or concentrated investing is a challenge.

What I do is buy a mutual fund in super for market risk & diversification and tilt my portfolio allocation with a discretionary account in ETF’s, cash and individual stocks.

By: Dean Morel

Dean Morel — Tue, 16 Mar 2010 04:24:38 +0000

Hi Sean
I don’t understand why a retail investor would bother would portfolio optimisation. Go with what you know I say. Stick with you circle of competence. I don’t know bonds or precious metals, I’ve only got average knowledge on REITs. There is no way to be an expert across all those areas and is there really a need to optimise? For example, tradies should stick to property as that is what they know, is there really any need for them to diversify into areas where they have no edge and then have to TRUST others? Do I have any need to invest in Bonds? Concentrate on your strengths and forget about your weaknesses.