Patience Pays Off

June 15, 2011

Vanguard has two share classes for its mutual funds.  Investor shares are for hoi polloi and Admiral shares are for clients with high balances or who are long-term shareholders.  When Morningstar took a look at investor returns for the two share classes, they noticed an interesting feature: large and/or patient investors had much better performance than retail investors.

It turns out the more patient and/or wealthier Vanguard investors fared better than those in the Retail investor class most of the time. Specifically, in 13 out of 15 cases, Admiral share-class investors enjoyed better investor returns than those in the Investor share class. Their margin was greater than the difference in expense ratios.

For example, in the firm’s flagship Total Stock Market fund, Admiral shareholders enjoyed returns of 6.16% annualized compared with 5.35% for Investor shares. At Vanguard Value Index, Admiral shareholders earned a 4.84% annualized return compared with 2.61% for Investor shares.

Interesting, is it not?  It seems that perhaps patient investors do better than impatient investors, or that large investors are more patient than small investors—which may be related to how they achieved large investor status in the first place.

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From the Archives: Evidence-Based Investing

June 15, 2011

Evidence of long-term outperformance is the first and foremost reason to invest in any actively managed strategy. There is no need to guess which strategies are likely to deliver outperformance over the long-term when empirical data is so readily accessible.

On our website, we have archived nearly 20 research papers that present the evidence for relative strength investing, including the following.

AQR Capital Management recently published a paper in which they present the results of a momentum strategy (as defined by trailing 12 month price return) from 1927 to 2008. They compared the performance of U.S. stocks, broken into quintiles as defined by momentum.

(Click to Enlarge)

The top two quintiles were able to generate significant excess return over time. A proper understanding of the historical nature of relative strength investing is a critical factor in being able to commit to the strategy for the long run.

—-This article was originally posted on July 27, 2009.  There is still no need to guess which strategies might generate long-term outperformance.  Empirical data is still readily available!

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Politics and Economic Policy

June 15, 2011

I thought this article from The Economist was insightful and captures some of the frustration Americans feel right now.  Economic policy has been politicized.

If there’s something scary about the potential crises in Europe, America, and elsewhere, it’s this aspect: the status of economic policy as gamepiece in a broader, political conflict. That increases the odds that something big and bad may actually occur.

There is actually quite a bit of economic research showing how economies react in different situations, but it’s all been thrown overboard due to the politics.  I think all Americans would just be happy to get the economy going again.

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High RS Diffusion Index

June 15, 2011

The chart below measures the percentage of high relative strength stocks that are trading above their 50-day moving average (universe of mid and large cap stocks.)  As of 6/14/11.

This index has pulled back sharply over the past couple of months.  The 10-day moving average of this indicator is 40% and the one-day reading is 41%.    Dips in this index have often provided good opportunities to add money to relative strength strategies.

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