Comments on: Dimensional Fund Advisors Part III

By: Dimensional Fund Advisors Part II : WhereDoesAllMyMoneyGo.com

Dimensional Fund Advisors Part II : WhereDoesAllMyMoneyGo.com — Thu, 21 Aug 2008 17:35:36 +0000

[...] CLICK HERE TO GO TO PART III Share and Enjoy: [...]

By: This and That # 105

This and That # 105 — Fri, 15 Aug 2008 02:38:23 +0000

[...] Preet is writing a series of posts on Dimensional Fund Advisors. [...]

By: Preet

Preet — Fri, 15 Aug 2008 00:41:59 +0000

@ Michael James – Although I didn’t go over the paper again, I think that perhaps the claim that 80% of managers can earn back their fee might be a temporary advantage that exists until the market identifies them and puts the money into the funds. Over time underperformance will creep in. I think I remember hearing something to that effect and the following argument was that there exist managers who can outperform, but by the time you can identify them, the advantage will have disappeared – or put another way, there is no way to identify them in advance.

By: Joe Dolan

Joe Dolan — Thu, 14 Aug 2008 18:40:13 +0000

Jerry Javasky of Mackenzie ivy canadian fund is an example of an active fund manager who severely underperformed the market in the last five years. Mr. J. had an aversion towards resources and materials.

If you had simply bought the xiu five years ago and held it you would have left Mr.J in the dust.

All the best——–Joe

By: Preet

Preet — Thu, 14 Aug 2008 15:09:50 +0000

@ Jordan – thanks for putting together those wonderful quotes. Indeed some of the best money managers of all time share this notion and I will dig up their similar quotes as well.

@ Michael James – yes, I was scratching my head at that. I’m sure there is more to it and it probably warrants a separate blog post (wink, wink, nudge, nudge) You’d be much better at deciphering the math in that paper than I could ever dream of.

p.s. thanks for the proof-read

By: Michael James

Michael James — Thu, 14 Aug 2008 15:01:17 +0000

I agree with your assessment that money managers follow the crowd. They get paid roughly the same no matter what their performance is, unless they get fired. So, the goal is to not do too poorly. This is best done by following the crowd.

It seems hard to believe that 80% of money managers outperform the average enough to cover their fees. Does this mean that the other 20% underperform by 5 times their fees? It`s not possible for everyone to be above average.

P.S. You meant “bear” at the end of the first paragraph.

By: Jordan Clark

Jordan Clark — Thu, 14 Aug 2008 11:40:17 +0000

As I’m sure you and everyone is aware Warren Buffet has also said repeatedly that the average investor should invest in low cost passively managed index funds. Here are a number of his quotes that I found.

In a 1996 investment letter to his Berkshire Hathaway shareholders: “…the best way to own common stocks is through index funds….”

In his 1997 letter he writes: “Let me add a few thoughts about your own investments. Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.”

In his 2003 shareholder letter: “…those index funds that are very low cost (such as Vanguard’s) are investor friendly by definition and are the best selection for most of those who wish to own equities.

In his 2004 shareholder letter: “Over the [past] 35 years, American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: All they had to do was piggyback corporate America in a diversified, low-expense way. An index fund that they never touched would have done the job. Instead many investors have had experiences ranging from mediocre to disastrous.”

In the 2007 annual meeting: “A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money… The gross performance may be reasonably decent, but the fees will eat up a significant percentage of the returns”