Sunday, March 22, 2015

Tuesday, March 3, 2015

Index Investing vs Value Investing, which is the winner's game.

So welcome to another Facebook debate on Index investing and Value investing. Below is the premise I posted on my Facebook Profile that generated the debate;

"Investing is all about common sense. Owning a diversified portfolio of stocks and holding it for the long term is a winner's game. Trying to beat the stock market is theoretically a zero-sum game (for every winner, there must be a loser), but after the substantial costs of investing are deducted, it becomes a loser's game. Common sense tells us, and history confirms, that the simplest and most efficient investment strategy is to buy and hold all of the nation's publicly held businesses at very low cost. ‪#‎Kpakpakpa_Investing‬ ‪#‎IndexInvesting‬ Who agrees?

Comments & Arguments:
  • Avor David Mawutor I partially agree
    19 hrs · Unlike · 1
  • Patrick Edem Agama Hmm partially? Then I guess u more than 80% partially agree. Anyway make ur point bro. Where are the value investors?
  • Patrick Edem Agama Just so u know , this is 'proven' even on our 'under-developed' market. GSE.
  • Benedict Sumah You will achieve a return closer to the risk free return if you just gather across all stocks. If you build in certain weights such that your portfolio is slightly unbalanced, then you stand the chance of being rich because of the market or in reverse losing money more than anyone else when the chips are down. Nobody has made it being avarege
    18 hrs · Unlike · 3
  • Avor David Mawutor Warren Buffet says "put your eggs in FEW baskets (i.e. stocks you know much about and understand the fundamental business behind) and watch those baskets closely (I.e. monitor regularly)". That is the strategy of the real investors. That's why they make money even when the market is generally down. Diversifying by buying a little of every stock is actually a "fearo" strategy backed by little research.
    17 hrs · Unlike · 1
  • Patrick Edem Agama Lol. Avor David Mawutor. That's one way to look at it. Another better way is buying into Index funds what is known as Index investing. Just so u know, the same Warren Buffet recommend strongly this form of investing by backing the founder of Vanguard Group , John Bogle, in his book "The Little Book of Common Sense Investing”.
    Let's not just focus on buying "little of every stock" but owning a diversified portfolio and HOLDING it for long term. Research in more advanced markets have proven that, at the long run, there's always a win no matter how the market goes. Contrasting this to the strategy of "putting ur eggs in few basket" , there's higher probably of ups & downs and probably more downs than ups for those who don't really pick stocks well or 'understand' the companies they pick. I must say, your 'NON-FEARO' strategy sounds good but note this Index funds eliminate the risks of individual stocks, market sectors, and manager selection. Only stock market risk remains.
  • Avor David Mawutor Exactly! So we r just saying the same thing, which is - broad market diversification is good for the AVERAGE investor. But what makes the great investors great is that, they use a different strategy - minimum diversification in well researched companies which they monitor closely or even have a say in their daily operations.
    16 hrs · Unlike · 1
  • Patrick Edem Agama So back to my point....."the simplest and most efficient investment strategy is to buy and hold all publicly held businesses at very low cost." ...... obviously you should agree 100% . Not partially.
  • Avor David Mawutor I agree on the "simplest" part but not the "efficient" part. Hence, I maintain my partial agreement.
    16 hrs · Unlike · 1
  • Benjamin Kofi Nyarko Interesting so far, what i can say about value investing and diversifying your portfolio is.
    We all understand that value investing requires that you research a stock very well and wait until it gets to the right price to either buy or sell (buying lo
    w,selling high)
    However a diversified portfolio requires the investor to spread his risk over a number of different stocks
    In my view, those who do value investing need not worry about diversifying their portfolio since they have researched and are confident that those stock were undervalued before buying.
    However someone diversifying his portfolio need not worry about research since he is always assured of average returns.
    I therefore agree with Avor David Mawutor , diversification is "simple" but "not efficient". Value investing is "not simple" but "efficient".
    6 hrs · Like · 1
  • Boakye Ogyem As a strong proponent of value/active investing , it's so natural that i won't prefer having anything to do with indexing. firstly, i do believe indexing gained it s prominence through the activities of active investor whose constant and consistent activities purged the market of all inefficiencies, through their relentless pursuant of superior returns backed by cutthroat research . these actions t therefore paved way for index investing because the market became well priced through the activities of active investors . i therefore believe that if most investors are to index then these salient mispricing of assets will re-evolve, thereby paving way for superior return to the few investor who will still adhere to the value investing tenet . Secondly, indexing is a form of irrational investing. the reason for such assertion is that , in indexing you buy into the index irrespective of how the index is priced at that particular point in time , this means that if a particular stock in the index is pushed to astronomical levels you buy it. the problem becomes more compounded if the market uses a "market capitalization index" in which the value of the large cap stock can irrational distort the index's price.
    6 hrs · Unlike · 1
  • Patrick Edem Agama To Benjamin Kofi Nyarko What is efficiency when it comes to Investing??? I don't agree value investing is more than what I'm talking of. First of all, what shows the one who diversifies doesn't research well and diversify appropriately?? Finally my point is not just diversifying, but diversifying and holding for long. Don't forget, I also talked about buying at 'low cost.' (Virtually value investing just that it's done on a wider basis). What else could be better than this??
  • Patrick Edem Agama To Boakye Ogyem, I'm talking of indexing at "very low cost". So ur point that indexing is irrational investing is invalid here. Unlike other index investors, my point is very simple....buy at very low cost in all and hold for long. Talking of EFFICIENCY, u guys cannot dispute this. It is over the long term. Get me any research that proves this wrong. holding all factors equal on both sides.
  • Patrick Edem Agama Before any of you cite Buffet as example, consider how overly diversified Berkshire Hathaway is.
  • Avor David Mawutor Patrick, in fact, even this debate we are having is a "PASCO"; it is an age old debate. The position you are presenting is called the EFFICIENT MARKET HYPOTHESIS. It is based on a number of assumptions and although it has been accepted that there is a level of truth to it, its criticisms (BACKED BY RESEARCHES) have also been well documented. I suggest you google it and see.
    5 hrs · Unlike · 1
  • Avor David Mawutor About the issue of Buffet, don't forget - Buffet is an individual and Berkshire is a company which has a Board (notwithstanding the fact that Buffet owns the majority shares). So the decisions of Berkshire may not NECESSARILY be exactly what Buffet wants; there may be compromises in the Board Room. That aside however, still, although Berkshire is diversified, they do NOT hold (or invest in) the ENTIRE market.
    5 hrs · Unlike · 1
  • Patrick Edem Agama Yooo i hear.
    4 hrs · Like · 1
  • Boakye Ogyem  Patrick Agama , i think trying to buy index at low cost means timing the market and we all can attest to the impossibility of doing such a work, in fact timing the market has lead to more value destruction than creation. Secondly, i believe several investors have aced incredible performance when it comes to beating the market eg George Soros, Carl Ichan, Peter lynch, Ray dialo and your own man Steve Cohen. These men are leaving testimonies of the adsurdities of an efficient market hypothesis. Lastly, Patric there has been several instances where you've selected stocks on the GSE that have beaten the overall index, so why supporting passive investments now?
    4 hrs · Unlike · 1
  • Patrick Edem Agama Hmmm. It's just a valid statement I made. Anyway thanks for ur insights bro. And to everyone else that commented, More vim!!!!

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