Great article thanks. 'What's the answer for the casual investor' in 1 (b), you're effectively saying that it seems like a rare opportunity to successfully time the market. For the casual investor even faced with ideal conditions of liquidity during a significant decline, they will stuff it up indeed. Excellent call on buying Berkshire, I have had a large position for many years. This was even more obvious a couple of years back when the buybacks ramped up a great deal and it was trading at 13 x earnings, I upped my position to over 30%. Another thought would be an equal weight SP500 etf. Also as you know there is plenty of value under the SP500 or even pockets within, but perhaps not for the casual investor.
Thanks Matt, well written. Quoting Martin Shkreli who made similar arguments as you did, the 10% return expectation is often based on a post hoc ergo propter hoc logic which is dangerously fallacious.
He also made a point which I found compelling: In calculating real returns one should also deduct long term capital gains tax. For a typical US investor that has another 100-150bps drag leading to a meagre real return of 5.5%-6%, even if we assume 10% expectation is realised.
Thanks Andy. Yeah, regarding capital gains tax, deferral of that tax burden until the point of sale is one of the main advantages of the indexing strategy. It's why your chances of after-tax outperformance as a stock picker in an efficient market aren't ~50% but well below.
Say you make an 8% nominal return for 30 years, and pay capital gains tax when you sell at the end - your annualised after-tax return is 7.3%, and you end up with 8.25x what you put in. If instead you paid the 20% tax on each year's gains as they happen, you make a 6.4% annual return, and end up with only 6.43x what you put in.
Great article thanks. 'What's the answer for the casual investor' in 1 (b), you're effectively saying that it seems like a rare opportunity to successfully time the market. For the casual investor even faced with ideal conditions of liquidity during a significant decline, they will stuff it up indeed. Excellent call on buying Berkshire, I have had a large position for many years. This was even more obvious a couple of years back when the buybacks ramped up a great deal and it was trading at 13 x earnings, I upped my position to over 30%. Another thought would be an equal weight SP500 etf. Also as you know there is plenty of value under the SP500 or even pockets within, but perhaps not for the casual investor.
Thanks Matt, well written. Quoting Martin Shkreli who made similar arguments as you did, the 10% return expectation is often based on a post hoc ergo propter hoc logic which is dangerously fallacious.
He also made a point which I found compelling: In calculating real returns one should also deduct long term capital gains tax. For a typical US investor that has another 100-150bps drag leading to a meagre real return of 5.5%-6%, even if we assume 10% expectation is realised.
Thanks Andy. Yeah, regarding capital gains tax, deferral of that tax burden until the point of sale is one of the main advantages of the indexing strategy. It's why your chances of after-tax outperformance as a stock picker in an efficient market aren't ~50% but well below.
Say you make an 8% nominal return for 30 years, and pay capital gains tax when you sell at the end - your annualised after-tax return is 7.3%, and you end up with 8.25x what you put in. If instead you paid the 20% tax on each year's gains as they happen, you make a 6.4% annual return, and end up with only 6.43x what you put in.