Warren Buffett says famous hedge-fund bet delivered this unexpected lesson

[Banjo]

"It’s a ‘terrible mistake’ for long-term investors to measure risk based on a ratio of bonds-to-stocks in portfolio"
https://www.marketwatch.com/story/w...t-delivered-this-unexpected-lesson-2018-02-24

 

[ironchef]

"It’s a ‘terrible mistake’ for long-term investors to measure risk based on a ratio of bonds-to-stocks in portfolio"
https://www.marketwatch.com/story/w...t-delivered-this-unexpected-lesson-2018-02-24

My questions to you and the ET professionals are:

1. If my time horizon is 20-30 yrs, why don't I put everything into the asset class with the highest return (for example RUT rather than DIA or SPY)?

2. If over most 20-30 yrs period, RUT consistently beats DIA, why is the measure of risks consistently higher for RUT?

3. Is Beta the correct measure of risk if not what should I use?

 

[Visaria]

Is the future going to be the same as the past?

 

[SteveM]

My questions to you and the ET professionals are:

1. If my time horizon is 20-30 yrs, why don't I put everything into the asset class with the highest return (for example RUT rather than DIA or SPY)?

2. If over most 20-30 yrs period, RUT consistently beats DIA, why is the measure of risks consistently higher for RUT?

3. Is Beta the correct measure of risk if not what should I use?

I'm not a professional, but...

Here are the largest draw-downs for the the Russell2000 index:

Couple the above chart with the fact that the Russell2000 index is trading at 132X ttm earnings (http://www.wsj.com/mdc/public/page/2_3021-peyield.html?mod=mdc_uss_pglnk), and it is pretty clear why you shouldn't just dump all your money into RUT.

If you are comfortable with the real-risk of 80% drawdowns (based on historical RUT price action coupled with current valuation) then by all means, invest fully in it. But do remember, those people who bought the top in the 1989 bull market in Japanese stocks are still underwater on their initial entry, nearly 30 years later.

 

[Visaria]

If you are comfortable with the real-risk of 80% drawdowns (based on historical RUT price action coupled with current valuation)

How do u figure 80% drawdowns?

 

[zhucap]

My questions to you and the ET professionals are:

1. If my time horizon is 20-30 yrs, why don't I put everything into the asset class with the highest return (for example RUT rather than DIA or SPY)?

2. If over most 20-30 yrs period, RUT consistently beats DIA, why is the measure of risks consistently higher for RUT?

3. Is Beta the correct measure of risk if not what should I use?

1. Betting that RUT will outperform DIA or SPY or QQQ or EEM in 20-30 years is a good bet with high probability but who knows if it will. My own thought process is to be diversified in low cost broad based index funds both US and international because... who knows which will outperform so best to have a bit of each. The % allocation is on you.

2. I think on a gross performance level RUT outperformed SPY and highly likely to continue but can't take it as certain. RUT has higher volatility so you will go through more drawdowns. Again, buy and hold 30 years you are good, but if you try to time it you get crushed.

3. Using beta is a fancy word. Just aim to get vanilla market returns (i.e. what the market gives you and essentially beta) using low cost broad based stuff.

But instead I trade

 

[SteveM]

How do u figure 80% drawdowns?

Just saying it is a realistic worst-case scenario for the Russell2000. In year 2000 (widely considered to be the biggest stock market bubble in this country's history), the Russell2000 "only" got up to a 60X p/e ratio (https://www.marketwatch.com/story/h...h-about-the-russell-2000s-pe-ratio-2017-08-18) - which was right before the NQ went on to lose 82% of it's value, peak-to-tough. Today the Russell2000 trades at 132X earnings according to the WSJ link I posted.

Not unreasonable at all to assume a big bear market could drive that down -80% to around 25X earnings.

 

[srinir]

My questions to you and the ET professionals are:

1. If my time horizon is 20-30 yrs, why don't I put everything into the asset class with the highest return (for example RUT rather than DIA or SPY)?

2. If over most 20-30 yrs period, RUT consistently beats DIA, why is the measure of risks consistently higher for RUT?

3. Is Beta the correct measure of risk if not what should I use?

1. There is also tracking error and behavioral risk. It might give excess return over the long term, but when everyone is zigging your investment might zag. Not many can handle that.
2. Measure of risk is higher because of standard deviation of returns are higher for smaller caps. Standard deviation is close to 1.5 times the SPX.
* Risk is higher because of small caps returns better only in expansion of economy and does worse in contractions. Investors need to get compensated for holding this worse performing asset in bad times also (economic cycle risk).
* Generally less liquid and high volatility of earnings
* Small caps are also highly levered compared to big firms
3. There are many measures of risk. Along with beta and max draw downs is good one to use.

 

[lawrence-lugar]

Is the future going to be the same as the past?

In regards to the top 10% or 1% controlling everything, while the 90% scrape by...then yes.
That same ratio has existed since the beginning of time.

There's a quote about this by Jeremy Irons in the 2011 movie, Margin Call.
It's Lonely at the Top. He was eating a fine steak and a bottle of wine in the top tower floor restaurant alone in this scene.

 

[Handle123]

I'm not a professional, but...

Here are the largest draw-downs for the the Russell2000 index:

View attachment 183089

....

Why is it the innovators, the top 0.001 % laugh at this, as the same as Gate's, Buffett, Jobs, Huang-Malachowsky-Priem, Watson-Flint all encountered that the top is always lonesome, you perseverance, find ways to prosper when the majority go down with the ship.

Don't we all start life as non-professionals?