Greenblatt on the small investors’ advantage

7 Comments

• 
  Monevator April 22, 2011 at 7:44 pm

  I wonder if that last comment from Graham also ties into his effective ahead-of-his-time endorsement of trackers, ultimately. (Don’t have the quote to hand – it was basically ‘by a wide basket’).

  I guess if you’re studying Greeks, writing plays, and chasing women all over Manhattan an index fund is attractive even if you’re a genius investor…

  Nice revamp of the site btw. Very nice.

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  • 
    Richard Beddard April 24, 2011 at 11:39 am

    Not sure Graham would have endorsed market-weighted index trackers. I think he advocated a wide basked of shares with certain characteristics (low PEs and low gearing, basically). In that sense he’d be very much in favour fundamental index tracking and Greenblatt’s approach with value weighted indexes. I think if Graham had lived to 150 and continued to evolve as an investor he may well have ended up where Greenblatt has! I also think many value investors will be intrigued by value weighted indexing and use it for parts of their portfolios. I hope we get something like it in the UK.

    Thanks for the compliment about the site BTW, I’ve always been an admirer of yours.

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    • 
      Monevator April 25, 2011 at 12:17 am

      Hi again,

      Have found the quote I was recalling, FWIW:

      “I have little confidence even in the ability of analysts, let alone untrained investors, to select common stocks that will give better than average results. Consequently, I feel that the standard portfolio should be to duplicate, more or less, the DJIA.”
      -Benjamin Graham in The Memoirs of the Dean of Wall Street

      http://www.fivecentnickel.com/2009/04/10/benjamin-graham-and-the-wisdom-of-index-funds

      Then again, it was just one quote out of hundreds of thousands of words, including the textbook of value investing. So perhaps we shouldn’t give it *too* much weight.

      best

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      • 
        Richard Beddard May 4, 2011 at 11:38 am

        Thanks for the quote Monevator. I’d be interested to know when Graham said/wrote those words as he certainly became disenchanted with security analysis after his retirement. It’s just a guess, but I think he probably said this then, and before he’d worked out his mechanical strategy for achieving a 15% return by focusing on companies with low gearing and low PEs. I don’t think, as has been claimed, say in Malkiels book, that Graham made a late conversion to market efficiency. See: http://blog.iii.co.uk/what-a-difference-five-words-make/ for why I’m very suspicious of quotes plucked out of context!

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    • 
      lostinmidlands May 1, 2011 at 7:29 pm

      What evidence do we (or rather, can we) have to favour Greeblatt’s value-weighted indexes over, say, RAFI indices (http://www.researchaffiliates.com/rafi/index.htm)? The latter are already available in the UK through Invesco Powershares ETFs.

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      • 
        Richard Beddard May 3, 2011 at 6:54 am

        Hi Lost in Midlands. I’m no expert in fundamental indexing and value-weighted indexing is new to me although the second seems like a logical progression from the first. It looks as though Greenblatt addresses the precise issue you raise though. The front page says the Annual return of the RAFI FTSE 1000 Fundamentally Weighted Index over trailing 20 years is 12.2% and the Annual return of the Value-Weighted Index over trailing 20 years is 16.1%.

        I have no idea to what extent those indices are comparable and in the smallprint below it says the Value index includes reinvested dividend income and the others he quotes don’t.

        Reply
• Weekend reading: The Economist does pensions April 23, 2011 at 11:02 am

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