Returns Delivered by Index Funds

Comments on “Competition Has Made Indexing a Winner’s Game,” by Charles D. Ellis, in the November 2016 AAII Journal.

If you think in terms of real returns, an investor gives up even more to pay for active management. With inflation at, say, 2%, Charley’s 7% nominal growth rate would become a 5% real growth rate and investors would give up roughly a quarter of their returns. And taking compounding into account, for a 20-year holding period investors would give up roughly half of their returns.
—John Newman from Illinois

What about the argument that, because Charley is so right here, and because more and more people know it, index funds are increasingly popular and therefore artificially bumped up in price? Doesn’t that leave non-indexed issues in a zone where they might be underpriced? And doesn’t it mean individual investors who have the stomach for it should look at smaller issues? (My own answer to this question, by the way, is that the slight overprice for indexes is worth it, but that’s because I’m not willing to spend the time that a great investor would.)
—Michael from Louisiana

Thoughts on CAN SLIM Stock Screen

Comment on “William O’Neil’s CAN SLIM Approach to Selecting Growth Stocks Using Fundamental and Technical Data,” by John Bajkowski, in the November 2016 AAII Journal.

Beware that the stocks you grab through this approach rarely last long term—generally it is around two months to one year. You just about always have to have a stop-sell order on them, as many reverse early after a breakout.

I followed the system for a fair number of years. My end judgment is that the system is highly flawed for the average investor. For one thing, it is very, very, time intensive. Stock Investor Pro is a big help here, but the stocks it used to select were either not high scoring on the IBD stock checkup or were not in the breakout range.

They tell you to sell any stock when it drops 8% below your buy point, but never address buying it back, except to treat it like a new potential stock again. At least that is what they said when asked using their contact system. I do question the responses I got from that method, as answers sometimes seemed at odds with what I read in their daily paper and the book.
—David Humphrey from Arizona

Guidance on Writing an Investment Policy Statement

Comment on “The Art of Creating an Investment Policy Statement,” by Clark M. Blackman, in the November 2016 AAII Journal.

There is an excellent book written some years ago by Charles D. Ellis titled “Investment Policy.” It’s well worth reading if you can find a copy; it is extremely helpful when writing an investment policy statement.
—Lawrence Gillen

Improving Guidance on Social Security Benefits

Comment on “Social Security Administration Accused of Giving Incomplete Information,” in the Briefly Noted column in the November 2016 AAII Journal.

I have applied for SSA benefits. The people I have dealt with were courteous and knowledgeable. However, the Programs Operating Manual System (POMS) is so voluminous and detailed it is unlikely that anybody could follow it. I suggest that all SSA administrators be required to spend at least one month per year helping the public with some of the more complex cases and have the GAO audit and publish the accuracy and completeness of their work. This would help in three ways: they would have less time to make new rules, they would gain an appreciation of how complex and difficult the current directives are, and the employees who normally help people would have more time to improve accuracy.
—A. Thompson from Michigan