Ranking the Experts


H

honda.lioness

Who was best at seeing the riskiness of the market and advocating
accordingly circa 2007 and earlier? My take follows.

1. Zvi Bodie (winner)
What he advocated: If you are wealthy, do not worry about being
invested in stocks. Otherwise he says load up on Series I bonds
(taxable accounts) and TIPs (in IRAs etc.).
What he himself does/did: 95% in TIPs and 5% in out-of-the-money call
options on a market index, good for three years. [A call is a bet
that the market will rise. Calls are "out of the money" when the
strike price is greater than the market price of the underlying
security.] It has a low probability of paying off, but if it does,
you'll make a killing.

2. Robert Shiller
What he advocated: "You don't have to bother with stocks at all for
awhile." If you can't resist, he adds, buy value stocks; but only a
few; and spread it out over the world. If you have no experience, buy
inflation protected bonds.
What he did/does: Owns little stocks. Invests in funds that invest in
real estate and bonds. Buys municipal bonds, real estate, investment
trusts, and an international value fund that invests in low-priced
stocks outside the United States.

3. Scott Burns
Advocates couch potato portfolios which consist of just a few low cost
index funds, with the allocation per the investor's desires.
Encourages a strong index bond fund presence.

4. Benjamin Graham
Value stocks. Discourages banks and financials for novices but
considers some acceptable for the more sophisticated. Believes in
bonds when the market is doing xyz.

Tied for last:

Jeremy Siegel
What he advocated: Index mutual funds, currently tilted towards small
value indices.
What he does: Same

Suze Orman
What she advocates: Over the years seems to promote no load mutual
funds, invididual stocks, and ETFs. Has said bonds for retirees is
mostly bunk and so disapproves of Target Retirement Funds.
What she does: Has about 10% invested in stocks and the rest in zero-
coupon municipal bonds. All the bonds are triple-A rated and insured
so even if the city goes under, she says she gets her money. She takes
a little lower interest rate to make sure my bonds are 100 percent
safe and sound.

Dave Ramsey
What he advocates: Mutual funds with long proven track records, about
equally divided among Growth, Growth & Income, Aggressive Growth and
International. Front loaded mutual funds are okay. No bonds.
What he does: Same.

Warren Buffett
What he advocates: Index funds.
What he did: Commentary on how his company is faring in the sub prime
crisis appears at http://en.wikipedia.org/wiki/Warren_Buffett#Suggestions_of_Financial_Failings
. It is not pretty and took me by surprise. A recommended read for
today. I am ignoring the commentary on his Coca-Cola stock, because
what happened to Coca-Cola is nothing compared to what happend to BH
in 2007-2008.
 
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J

JoeTaxpayer

Who was best at seeing the riskiness of the market and advocating
accordingly circa 2007 and earlier? My take follows.

1. Zvi Bodie (winner)
What he advocated: If you are wealthy, do not worry about being
invested in stocks. Otherwise he says load up on Series I bonds
(taxable accounts) and TIPs (in IRAs etc.).
Wait a second - Bodie has 'always' advocated this. His strategy (as you
say, the use of very out of the money calls) will produce mediocre
results year on year, decent results in an explosive year, and avoid
down years. He wasn't prescient, just a chicken little who was finally
right.

At least Nicholas Nassim Taleb included puts in his strategy, and wrote
in his book "The Black Swan" that we underestimate the frequency of such
disasters.

Jim Cramer, whose TV persona differs from his level headed book advice,
was one of the first to call the financial meltdown.

Ben Graham is long dead, no fair including him, sounds too much like 'WWJD'.

Joe
 
H

honda.lioness

Wait a second - Bodie has 'always' advocated this.
Point taken. Maybe I should instead recognize Business Week for
calling him out in early 2008, per a Will Trice post back then. See
http://www.businessweek.com/magazine/content/07_37/b4049090.htm?campaign_id=rss_magzn

I will consider moving Shiller to #1, since he seems to have had a
grip on the nonsense leadig to the subprime crisis.

snip for brevity; all is noted.
Jim Cramer, whose TV persona differs from his level headed book advice,
was one of the first to call the financial meltdown.
Did he tell people to stop buying stocks? Did he himself get out of
the market? If he is not putting his money/reputation fully where his
mouth is, then I hesitate to credit him. Remember the guy told people
in September that Wachocia was great; buy it; and the stock came
crashing down in the following weeks. If he says one thing int his
book and another on the air, how are people to tell what he really
thinks?
Ben Graham is long dead, no fair including him, sounds too much like 'WWJD'.
What would Jesus do? Pardon? Admittedly Graham is messianic to me but
maybe Shiller is catching up. ;-)

How come his strategy cannot count here? For one, he recognized the
risk of financials. Plus I think anyone who recognizes the value of
keeping high grade bonds and/or CDs in one's portfolio either (1) in
greater proportion as one ages or (2) with consideration for stock
dividend yields deserves credit. Siegel, Orman and Ramsey lose points
because they either express contempt for bonds or do not point out
their merit.

I should have included Clark Howard in the list. He advocates
diversification and puts emphasis on having high grade bonds. He seems
to have held about 40% of his portfolio in muni bonds apparently
through this past year. The rest of his holdings are a diverse
portfolio of stocks. Put him in the top five.
 
J

JoeTaxpayer

I should have included Clark Howard in the list. He advocates
diversification and puts emphasis on having high grade bonds. He seems
to have held about 40% of his portfolio in muni bonds apparently
through this past year. The rest of his holdings are a diverse
portfolio of stocks. Put him in the top five.
Too many good points to address, so I'll choose this note to agree on.
By diversifying properly, my 80+ yr old whom I advise was down under
15%, and her stock component will likely recover by the time the cash
would run out.
Joe
 
N

norak

1. Zvi Bodie (winner)
What he advocated: If you are wealthy, do not worry about being
invested in stocks. Otherwise he says load up on Series I bonds
(taxable accounts) and TIPs (in IRAs etc.).
What he himself does/did: 95% in TIPs and 5% in out-of-the-money call
options on a market index, good for three years.  [A call is a bet
that the market will rise. Calls are "out of the money" when the
strike price is greater than the market price of the underlying
security.] It has a low probability of paying off, but if it does,
you'll make a killing.
I'm not an expert on call options, but with 5% in these call options
how much of a killing would you make if the market went up, say, 10
per cent? What is the leverage here?
 
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J

JoeTaxpayer

norak said:
I'm not an expert on call options, but with 5% in these call options
how much of a killing would you make if the market went up, say, 10
per cent? What is the leverage here?
Options are not so simple, or at least a detailed answer to your
question would take quite a bit of space and time. A brief reply:

The Dec '11 SPY calls with a strike of 120 (this is the S&P ETF, 3 years
out, 30% out of the money) has a premium of $9.65.

If one has $100,000, and purchases $5000 worth of these options, you
could buy 5 contracts, and would see any gain beyond the 30% rise. (Of
course, the first $9.65 of gain is needed to break even on the purchase)
The 5 contacts are options on 500 shares of SPY, and you are not quite
50% leveraged.

But, from what I understand of Bodie's strategy, he'd allocate 5% per
year, so you'd make such a purchase each year, and once you are 3 years
into the plan, you would be about 150% leveraged.

The 'killings' are to be made on swings that are far wider than a few
STD deviation from the norm. The Dec 09 150 calls are now only 24 cents
ask. If the S&P goes up to 1600 by then, your $24 would be worth $1000.

Joe

www.blog.joetaxpayer.com
 

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