No 5 Slice and dice

This portfolio is very popular among experienced advisors and the more sophisticated investors in our community. Slicing and dicing involves chopping up the market into many asset classes and buying only those that as a group deliver solid returns with modest risk. We hardly endorse this strategy. In Chapter 15, we noted our reservations that this practice can lead to inefficiencies. As previously mentioned, a questionable use of slicing is when two adjacent indexes such as a small growth and a...

In Theory at Least

With all that is known about the poor results of active stock picking, why do so many investors still buy high-cost mutual funds and churn their stock portfolios The answer is simple because they are told to do so, every day, explicitly or implicitly, by the financial media and their advertisers. Gregory Baer and Gary Gensler The Great Mutual Fund Trap, Broadway, 2002. Just about every plausible theory of the markets today suggests that stiff competition makes it tough to beat the publicly...

What Really Smart Money Thinks

I'd compare stock pickers to astrologers, but I don't want to bad-mouth the astrologers. Eugene Fama, University of Chicago Finance Professor inancial markets are competitive, or we could all place easy bets and get rich instantly. But how competitive are they Are they so competitive that it is a poor wager to spend resources, time, and energy to try to beat them Or are there certain clever managers we can identify in advance who will lead us to riches This is the crucial debate the novice...

Critics of Efficient markets

One particularly intriguing critique of the Efficient Market Theory has been developed by Professor Richard Haugen of UCLA. He raises the dominant anomaly among stocks Why do value stocks outperform growth stocks fairly reliably and offer apparently lower risk This is not an anecdotal phenomenon but rather based on groundbreaking research by Eugene Fama and Kenneth French when they were at the University of Chicago and MIT, respectively. Haugen notes that value stocks perennially outperform...