Jason Zweig say ‘value investors’ are the only real investors. Index funds beat them all.
Posted by John T. Reed on
Rare column by Jason Zweig in this weekend’s WSJ.
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It starts, “I’ve had it. The Wall Street Journal is wrong and has remained wrong for decades about one of the most basic distinctions in finance.”
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And what is that? Sounds like Zweig is a Benjamin Graham follower, a “value investor.” His column has the same title as one of Graham’s books: The Intelligent Investor. And he believes that anyone else in the stock market is NOT an “investor” worthy of that name. (One of my books is title Best Practices for The Intelligent Real Estate Investor.
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The two things whose prices he is recently agitated about are Game Stop stock and cryptocurrencies.
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Value investors look at the fundamentals of the company in question and of the current market.
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Graham said other approaches are not immoral or anything, but that they should only be done as a sort of amusement with tiny percentages of your net worth.
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I believe that stocks move in three different ways:
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• according to fundamentals
• irrational exuberance
• irrational despair
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I also believe there is a phenomenon I call “regression to the fundamentals.” That means that irrationality tends to be followed by movement toward the “intrinsic values” that Graham said exist and matter. But I hasten to add that “the market can remain irrational longer than most can remain solvent” (John Maynard Keynes). The time it takes for irrationality to subside is indeterminate and can take decades.
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In the Great Depression, the stock market fell 90%. I believe Graham’s “intrinsically valuable” stocks fell 60%. Did he beat the point spread? Yeah, but advice that results in people losing 60% of their investment deserves faint praise.
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Basically, as the Depression approached, you needed to have more bonds, fewer stocks, and maybe a value-in-use asset like a home. It fell in dollar value during the Depression, but it gave you a place to live. Also, a business that produced necessities were of some value.
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Stocks are an asset class that can fall 90% and stay down for decades. Thoughtfully-selected value stocks are an asset that can fall 60% and stay down for decades.
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If they can do that, how can anyone recommend having them? There seems to be an underlying assumption that all intelligent, responsible citizens should own stocks and spend some time each week or month studying stock fundamentals and rearranging which stocks they own accordingly. But that may result in your losing 60% of that money.
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I have had index funds at times and do now, but I prefer a diversified bunch of “value” foreign currencies, homes, durable metals of which you take delivery, business inventory. Soon, I will reduce the stocks and rebalance my foreign currencies. I have not checked but I do not recall a time when well-managed currencies all fell 90%.
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What about the idiots whom Zweig wants labelled as such by the WSJ? They provide some liquidity which is good. They provide needed capital to some corporations who put it to good use.
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What do the idiots have to say for themselves—some of them here at this wall? They claim they have made money doing what they do which “proves” they were right.
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Total bull! Decisions and predictions are to be judged on what the decision maker of predictor knew at the time. See my new book of June 2020 How to Spot Dishonest Arguments and keep your own thinking straight.
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In the stock market, which another respected financial writer, Burton Malkiel, said is an efficient market (all that is pertinent is instantly known to all and all prices at all times reflect those relevant facts), ALL the traders including Zweig’s “value” investors, knew nothing that could predict future prices of the stocks.
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WSJ sells information to not only to the thoughtful investors, but also idiot financial thrill seekers, and idiots who have some worthless technical or other way of predicting stock prices. They, understandably choose not to insult the less thoughtful of their readers.
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I agree with Zweig that they could call them “traders” or “gamblers” instead of “investors.” But I have called stock brokers bookies in three-piece suits. When you subject the results or just the logic of the thoughtful investors to rigorous logical analysis, screen writer William Goldman’s observation about Hollywood applies equally to Manhattan. “Nobody in this town knows anything.”
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Actually, his quote was,
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““Nobody knows anything...... Not one person in the entire motion picture field knows for a certainty what's going to work. Every time out it's a guess and, if you're lucky, an educated one.”
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What stock expert has been right over the long-term? Basically none. Don’t tell me Warren Buffett. I need mathematical data. Buffett is not a stock picker. He is an owner manager of a conglomerate. And he has run hot and cold over the years. See the LazyPortfolio link below about Buffett.
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http://www.lazyportfolioetf.com/comparison/warren-buffett-vs-us-stocks/?fbclid=IwAR328fb5NizMzSaUqxQXhSZiU0N7HdC_pLEM_S4XQQLSeLiB_9ieRGtFL2I
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http://www.lazyportfolioetf.com/comparison/warren-buffett-vs-us-stocks/?fbclid=IwAR328fb5NizMzSaUqxQXhSZiU0N7HdC_pLEM_S4XQQLSeLiB_9ieRGtFL2I
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Arguably, Mr. Zweig’s “value investors” have not done better than index funds. And index funds have not done adequately at times like the Great Depression. It may be that the value investors are really just another variety of speculator or gambler. Does value investing make more sense than other systems like technical analysis? Absolutely. But statistical analysis of the value investing compared to other systems shows that value investing is only marginally better if better at all. Its superiority is more intellectual than proven by performance.
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Buffett, by the way, recommends index funds.
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If you subject the decisions of ANY stock trader who claims to have made money on purpose to rigorous analysis and logic, you will find that their theory was irrelevant to what happened to them and that about 99% of what happened to those who did well was nothing but random good luck.
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