"Tad Borek" <borekfm[at]pacbell.net> wrote
On John Bogle
- quote -

The subject here (see top) is not Bogle's overall investing
philosophy. It is what he has said specifically about
indexing small caps. He has been somewhat interested in
this. See for example his paper at
http://www.vanguard.com/bogle_site/sp20020430.html, and note
this paper references an earlier paper of his also examining
indexing by market cap.

Some studies on the net argue that indexing is less
advantageous (and sometimes it is arguably inferior) as the
target cap of the index gets smaller. Some studies argue
otherwise. Overall, I am seeing a strong leaning towards
doubting the efficacy of using indexing for small caps, in
contrast to indexing larger caps. Bogle's doubts are part of
this.

This makes sense for a lot of reasons. To me, one of the
bigger ones is that the definition of "index" when it comes
to "small cap" is quite a bit more subjective and even
capricious. Bogle's small cap value index VISVX changed in
2003 from using the Russell 2000 Index to the MSCI U.S.
Small Cap 1750 Index. IMO, the reasons for this change are
nuanced.

- quote -

Tad, what I was saying is that five year mutual fund returns
saying something about the long term is not a reality but an
illusion.

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Elle wrote:
- quote -

In "Common Sense on Mutual Funds" he writes, "the cycles of small-cap
superiority have been relatively spasmodic...given the dominance of
small-caps in a single decade, I'm not sure I'd rely on it...Without the
relatively brief cycle of small-cap domination in 1973-83...large caps
were actually superior..." He speaks of reversion to the mean and
really, argues for a total market approach.

I'm sure you can find quotes from him that could be construed as
contradictory, but my point stands - he has never seemed sold on "the
size effect" as it's called in finance.

- quote -

You really need to stop doing that straw-man thing, or read posts more
carefully before replying, or both! I suggested "a simple reality check"
not "a comprehensive method of deciding what funds to buy." I strongly
suggest you dig further if you need a complete answer to this question,
there are plenty of studies out there looking at active vs. passive
management over multiple periods. If there's one showing
active-management superiority in this asset class over 10 or 15 year
kinds of periods I'm not aware of it.

-Tad

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On Jun 12, 7:19 am, Tad Borek <bore...[at]pacbell.net> wrote:
- quote -

I've been doing small cap allocations for a really long time as well
as calibrating against sp500 returns. The glitch in your analysis is
assuming buy and hold, which normally would be reasonable but small
cap have relatively easy cycles to identify where you want to bail out
for certain periods. Not with the usual confusing sucker rallies, etc
but a fairly slow evolution above or below the sp500 performance
curve. You can afford to miss the inflection points by a mile, and can
still outperform sp500 like crazy. I believe "darkness" related these
periods of avoiding smallcap to a certain phase of business cycles,
but you can also do just by watching performance.

- quote -

I have less experience here, but for most of this new century had both
an index and best of breed managed small cap value fund. It seemed
easy to find a managed fund that consistantly beat the sc index by a
lot year after year. I realize this is hard to quantify or project
into the future, but my point is that from a practical standpoint
smallcaps have been an easy way to outperform, diversify, and have
given the most obvious signals for the rare periods you want to bail
out of them.

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"Tad Borek" <borekfm[at]pacbell.net> wrote
snip for brevity
- quote -

Tad, this is contradictory to both what Ron cited as well as
other Bogle statements such as: "I'm a big fan of indexing
overall, but I'm not in favor of the small-cap indexes we
have," as quoted in
http://money.cnn.com/magazines/fsb/f...2808/index.htm .
Both of these are consistent with the longer interview I
thought I saw a few months ago but which now seems to be
unavailable via search engines.

On your use of five-year returns, a quick general comment:
Would you (or anyone versed in allocation) use five year
returns to decide on which category of funds to buy? Nor can
one "roll forward" specific category returns based on
five-year performances to mean anything. IIRC Bogle himself
attacked certain studies that showed superior returns of
actively managed small cap funds vs. indices, on grounds
that the time period was too short. You should google for
studies of small cap funds (active management vs. indexing).
The jury clearly seems to be out on whether small cap
indexing beats actively managed small cap funds.

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Elle wrote:
- quote -

Elle, more broadly -- Bogle in his books and discussions doesn't appear
to be sold on the idea that there is a long-term premium for investments
in small-company stocks, or value stocks. He repeatedly talks about
using total-market funds, which include small-company stocks and value
stocks, but without overweighting them. Or, an S&P 500 fund as a
reasonable proxy for "the market" (because the total market is dominated
by those 500 stocks anyway).

I think these are reasonable arguments...the small-cap premium isn't all
that big based on the academic research, and it's come and gone multiple
times over the years. And buying them piecemeal comes with investment
costs not borne in the total-market approach. So that's one piece --
maybe there isn't much point to buying small-caps separately.

Regarding indexing/passive management with small-cap stocks - some claim
that there are more inefficiencies in small-company stocks that can be
exploited through research, so it's a better area for active management.
You can do a simple reality check on this...pull up the performance for
Vanguard's or DFA's passive small-cap funds. Even at 5 years, Vanguard's
basic small-cap index fund looks to be ahead of 80% of the funds in the
category, based on return figures reported by Yahoo. And that figure is
actually low because of survivorship bias - the funds the disappeared
after only 5 years. Roll that forward for 10 or 15 years and it's hard
to make those arguments about active management in small-cap mutual
funds. So I suspect if Bogle was making a point against small-cap
indexing, it's about the "small-cap" part rather than the "indexing" part.

-Tad

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"Ron Peterson" <ron[at]shell.core.com> wrote
snip for brevity
http://www.indexfunds.com/articles/2...int_gen_JS.htm


Hi Ron, this captures the gist of the message I recall, but,
if memory serves, Bogle elaborated quite a bit more on his
sense of the small cap index fund disadvantage. For some
reason now when I google I cannot find what I am
remembering. Maybe the site was taken down, like it was a
news or magazine site with only a limited time. Thank you
for the basic Bogle message on this, though.

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On Jun 11, 7:35 am, "Elle" <honda.lion...[at]spamnocox.net> wrote:
- quote -

http://www.indexfunds.com/articles/2...int_gen_JS.htm
looks close where he says:
"I just didn't know how fragile those indexes were. For people who
want small-cap exposure, it seems that a small-cap index fund would
make sense, but unfortunately I haven't seen any small-cap indexes
that I'm completely happy with. "

--
Ron

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I thought I saw an article on the net earlier this year
where Vanguard's John Bogle talks thoughtfully about how
small cap indexing has not really proven itself, despite his
belief for some time that it would. Has anyone the link to
it?

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