The Inconsistent Investor

crispydoc Uncategorized 18 Comments

[Ed. note: This post is best consumed in combination with the comments that follow. I consider it an important personal lesson in 1) tempering the investing piety (defined as accepting a particular investing philosophy with unthinking conventional reverence) that often accompanies a financial literacy conversion experience, and 2) hubris in expressing criticism toward the efforts of a  fellow blogger. I was guilty on both counts here, was called on it in a very gracious manner, and plan to leave it as a public reminder of one of my less proud moments in hopes that I’ll learn from it going forward.]

The White Coat Investor podcast recently interviewed Paul Merriman, who (if I understood him correctly)  described how half his investments are mostly buy and hold passive index fund investing a la Bogleheads adulterated with some funds from Dimensional Fund Advisors, while the other half are invested via his personal market timing strategy.

Mr. Merriman alluded to having accumulated far more money than he and his wife will need or use in retirement, so perhaps the half invested according to market timing is his “fun money” that allows him to regard this sum as chips he’s willing to lose at the roulette wheel in Vegas.

I’d not encountered Mr. Merriman nor his investing philosophy prior to the podcast, so this was my sole impression of what appears to be a congenial man dispensing avuncular wisdom based on his experience. I don’t haunt the Bogleheads forum as often as I once did thanks to the recent explosion of physician finance blogs that occupy most of my reading time.

From WCI’s interview, it sounds like Mr. Merriman’s encore career following retirement has been to increase financial literacy through free workshops, and he seems enthusiastic and devoted to this higher calling.

Regarding market timing: I was surprised this would get any air time from WCI. Claiming that market timing “diversifies” the risk of one’s portfolio of passive index funds is inaccurate verging on dangerous. It’s unwise to mix discredited investing strategies with sound ones as if they had equal legitimacy.

I don’t mean to underplay that we are all humans with frailty built into our hard-wiring. We are fundamentally inconsistent beings, and there are few thought purists among us who hold up under scrutiny of our actions. But to take a bad idea and provide it a large platform seems wrong, especially when it is politely tolerated by an interviewer who knows better.

As for WCI, I suspected he was trying to be a respectful host to a genuinely nice older investor and fellow Boglehead with whom he disagrees. He asked some softball questions along the lines of, “What makes you think you can market time successfully when so many others cannot?” These skirted the fact that market timing, by all reputable published data, is a matter of luck, not skill, and with a few spectacular exceptions (Warren Buffet) there is no persistence of performance over time. [Ed.: Please refer to comments below to witness the author eat a well-earned slice of humble pie.]

Some might claim that I am being intolerant; that what we need more of in our current world is civility and discourse among people of different religious and political affiliations. I’m all for crossing lines and having thoughtful discussions with folks we disagree with.

This is not about tolerance. This is about bad information. You want to diversify risk by alternating weekends at church, mosque and synagogue just so you optimize your odds of a pleasant afterlife? Be my guest, since the data are inconclusive.

Market timing, in contrast, does not work. It’s a non-controversy. [Ed.: Please refer to comments for a more nuanced assessment.]

I was all in a huff on my moral high horse when, reading through the comments section from that WCI podcast, I came across a post from Dr. Dahle referring to Jack Bogle’s endorsement of market timing (which he termed Tactical Asset Allocation). Even my exalted high priest proved a heretic to his own gospel of passive indexing.

This realization gave me a fresh perspective and helped me give up my crusade to expose the unfaithful. There’s plenty of room for human inconsistency in the world of investing – and if someone else chooses to market time, instead of obnoxiously protesting their strategy and risk making an enemy, I can graciously make room for them at my table and eventually hope to persuade a friend by example.

Comments 18

  1. Fully agree that market timing is shown not to work time and time again. You can have a run of great investments and think you are the next warren buffet but to do it consistently and for long periods is almost impossible.

    Warren Buffet is successful now because of the Warren Buffet effect. When he purchases a company he feels is at a low, the media spreads that information almost instantly and what do you think happens? The rest of the sheep think hey i should buy it too. And thus the stock price increases and Buffet looks like a genius.

    So unless you have that big an influence on the media/market like Buffet you are really gambling not investing.

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      Having recently read “The Snowball” (the authorized Buffett biography) it was more complicated when he started out.
      Before he was an elephant investor setting trends, Buffett was picking the ugliest and least favored stocks he could find as a shrewd investor who knew the value of the underlying assets better than most. His influence seemed to follow only after he survived catastrophic markets when those who ridiculed him did not.

      Agree with you that there is a huge roulette element to timing with a large potential down side, but risk being a part of human nature, I don’t see this element going away soon. Some of the best strategies contain (rather than deny the existence of) our inconsistency as humans. We sink our own ship more often than we’d care to acknowledge.

      Thanks for stopping by,


  2. My perspective is Bogelheadism is a religion filled with straw men. I got beyond FI to actual retirement before I even knew what a Bogelhead was. Imagine that! I had read Jack Bogel and agreed with some of his investing philosophy but Bogelheads leave a lot to be desired. For example Bogelheads are all about cheap 5bp retail funds. I own DFA funds with long term market tilts that were designed by Nobel winners Fama and French. I’ve done extensive reading on Fama and French’s theory. My funds cost 22bp. My funds consistently pay 150bp more than the retail equivalent. My funds are not actively traded they are passively optimized and I pay an extra 15bp for the optimization.

    Retail funds have trading rules that force index following. When a stock leaves the S&P for example its price tends to be bid down bringing down the index (sell low). The new stock coming in tends to be bid up bringing down the index (buy high). So your fund is stuck tacking the index. These sell low buy high variations tend to reverse over the next 6 months due to momentum. If your trading rules therefore allow you to move your trade into the future a little you get to arbitrage the benefit. This is called “market timing”. While the Bogelhead is enjoying his self righteousness, I’m pocketing 135bp. The same is true of risk management.

    Bogelheads are in love with the 3 fund, because it improves “diversity”!!! if you actually analyze the 3 fund it’s risk adjusted diversity is terrible. Am I ever going to mention this to a Bogelhead? Not on your life because it goes against his religion. The 3 fund has a predicted return of 7.8% and a risk of 12.35% and the equivalent 2 fund portfolio using the exact same Total US stock and Bond funds, using allocation ratios that place it on the efficient frontier, has a 7.85% return with a 9.59% risk. Same return 29% less risky. If I know this why do Bogelheads not know this?

    Bogelheadism does provide a basic DIY portfolio that is relatively successful. It is full of warts however and not particularly optimized. It is better than Fidelity Magellan. Way to much of it is based on guess work and testosterone with a healthy does of echo chamber.

    Maybe Dahle is coming around in his old age. One of the biggest reasons I don’t read his sight is because it comes off too dogmatic.

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      Your ability to tolerate a big tent of investing styles is a mark of maturity in the investor life cycle.

      I realize I’m just following the natural life cycle of the investing enthusiast:
      Egg: I don’t need an advisor, I can do this!
      Larvae: Bogleheads make investing easy and cheap with a minimal time investment!
      Pupae: Boglehead purist.
      Adult: There are many roads to Dublin with nuances on the way for those who savor the game. Slice and dice, momentum, market timers, small cap and value tilters a la Fama and French, gold bugs, doomsday preppers. Live and let live. Be open to learning from alternative paths.

      Like the adolescent who knows everything until they suddenly don’t, investing orthodoxy abruptly fails you. I suspect all investors go through this range of realizations, but as was apparent at your first dance in the seventh grade, folks mature at different rates.

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  3. I am a truly inconsistent investor and I am totally fine with it. Passive investing works but there are instances where you need to tolerate the gut wrenching drawdowns.

    There is certainly room for trend following.

    Merriman has likely invested long enough to know that there are many ways to pull all this off.

    Losing capital is a very dangerous foray with most folks portfolio. The asymmetric returns needed to claw your way back to zero is what’s most scary about it.

    I have no issue with trend following, I just don’t think I can pull it off as I tend to stop watching my investments after a while. Add in the taxation issues, I’d lose from the start.

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      Dr. MB,

      Ultimately you only have to pass your personal sleep test to make peace with your investing philosophy. There’s data on momentum investing supports some degree of timing, but it’s a slippery slope. The mark of the mature investor, rather than denying their inconsistency, seems to be accommodating it in the least harmful and most productive way possible.

      Thanks for chiming in,


    2. I used to trade commodities and later stock options. You can make money, I made money, but it’s a LOT of work and hard on the brain. When I adopted my kids from China I brought a computer along to “night trade” since China is 12 hours ahead. I made about $50K “night trading” while there, enough to pay for both adoptions. I never had more than about 10K at risk. I was on a 14kbit dial-up internet line that I hacked into the hotel phone. I found the experience quite hilarious. I imagined the people monitoring my phone line were all “what’s this crazy…doing!!!” I have done several other speculations some have paid off big.

      I bought a penny stock for $15K on a tip for $.07 a share average. The stock went to .50 and I sold off the original $15K and put that in BRK.B. The stock went to .75 and I sold it down making about 60K net profit. I split that in half, bought a first car for my kids, put some in BRK.B and put the other half in BTC. I bought BTC at $275, let it go up, sold off the principal and let the interest ride, and put the principal into BRK.B. This is called a free trade. I’m up about 2800% in free money. I’ve had losses also for sure but I’ve learned a ton and had fun along the way. I never got greedy and never risked more than I could afford to loose, usually 5K to 15K. I was very selective on what I traded.

      I don’t invest like this of course, my investments are much more conventional, but there are a million ways to make money.

  4. Well said, Crispy Doc!

    I agree that there is a time for tolerance and viewing differing opinions, and times to simply ignore the nay sayers.

    I have friends at work that love investing in individual stocks, hold onto cash so they can “buy when the market is low,” and use actively managed funds… despite all of the evidence for passive index fund investing. It used to really irritate me until I realized that no amount of facts is going to prove to that person that there is a better way.

    Unfortunately, this is the same reason I am off of all of my personal social media and only use social media for my website. Most people are pretty close minded when it comes to ideas that are not theirs. (The trick is to make them think that they came up with it!).


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  5. The problem with the old adage “Market timing doesn’t work” is it isn’t entirely true. The data on trend-based marketing time is surprising good and fairly robust. It doesn’t show particularly higher returns, but it does show that you can get the same returns with lower risk, especially if you can minimize the costs and hassle of doing so. Now Merriman has taken it to sufficient extremes such that he had to hire someone to do all the mechanics for him, but a simple trend following scheme using a 200 day moving average? That doesn’t require too much hassle and should hardly be thrown out with all the crap out there people are doing to try to time the market based on a whim or some crazy doomsday article they read. It doesn’t require the ability to predict the future, can be automated, and doesn’t involve emotion. And past data suggests it works. So I’d be a little careful blowing it off until you’ve read up on it a bit more.

    And I’m not sure what you want for a hardball question if you think that one is softball.

    “What makes you think you can market time successfully when so many others cannot?”

    How would you phrase that in a polite but “hardball” way that would give you a different result than what I got with that “softball” question?

    1. Merriman uses timing as a form of non correlated diversity. All of his money is not in timing. Timing is like playing cards and understanding the odds. It is not guessing. It is statistical probability. Timing makes money because your trading rules win more often than they loose, but they will loose sometime. Timing is not investing it is risk arbitrage, a different way to make money. Commodities trading is risk arbitrage with leverage. Timing requires some kind of loss management so you can live to fight another day if you loose. It has tax consequences, trading costs, planning costs, and in Merriman’s case management cost. Big ERN uses a kind of risk arbitrage with his options trading scheme. His options trade is also a non correlated asset which diversifies his portfolio. These techniques require paying close attention and having the strategy well planned out. No guesstimation or set and forget allowed, aka they tend to be a lot of work. In addition the human component adds a lot of noise to the trading strategy because human emotion and statistics don’t mix. Human emotion signals Buy high Sell low. Buffet’s response to human emotion is “just don’t sell” That is a form of risk management and time arbitrage. If you plan that correctly you can buy low sell high which is precisely what Buffet does. BRK is sitting on a ton of cash right now because Buffet can’t find anything cheap enough to buy in this market. This also is a kind of market timing. I own BRK.B because I precisely want this diversity added to my portfolio. BRK.B is only about 30% correlated to VTI, excellent diversity.

      If you listen to the podcast (which I enjoyed) Merreiman tells you his strategy. It is to own some of many NON CORRELATED assets, and own them in efficient proportions so that no particular asset’s risk dominates. The portfolio just keeps percolating along and something in the mix is always making money. It’s an extremely good strategy. Merriman’s retirement goal is to live a good life with his wife, teach some peeps about investing and not die poor. One thing to note: Merriman is successful in his strategy so it’s definitely worth considering what he is doing. You may not choose to do it, but refuse to understand it at your peril. There is a lot of wisdom in what he said.

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      That’s a fair critique. Retrospective technical analysis dredges a lot of data that I wouldn’t consider to be a basis for a sound investing strategy, but those data I’ve seen comparing buy and hold with timing strategies using the 200 day moving average in tracking the S&P 500 are consistently provocative in their ability to reduce downside risk by having avoided the crashes of October 1987, 2000 and 2009. Having said that, the comparisons I’ve seen universally fail to factor in transaction costs or brokerage fees, which seem rather significant omissions for a comparison. If you are aware of studies that factor these costs in, I’d be grateful if you’d share them. I’ve no doubt there is more for me to read, and my dismissive tone in light of where I’m at and where I ought to be before issuing such statements is a point of embarrassment as I reread the post.

      To your second point, I’ve slept on it, and I can’t think of a better way to interview someone with an opposing point of view than the manner in which you did here without alienating them needlessly. One of the reasons I enjoy your podcast is it puts strategies that are completely foreign to me (merger arbitrage comes to mind) on my radar. It would be less valuable if the only investors you interviewed were orthodox Bogleheads with 3 fund lazy portfolios. Please accept my apology for an unfair pot shot, and thanks for calling B.S. in a respectful manner.


      1. This is a fantastic and refreshing exchange CD and WCI. Congrats! I sadly have grown far too accustomed to defensive and argumentative language on talking heads tv and social media. What I saw happen here is: 1) someone said some things that were a bit misinformed as well as a bit of an unfair criticism, 2) the criticized responded in a respectful way, 3) the someone listened with an open mind, 4) the someone acknowledged some degree of fault and respectfully apologized.

        It’s a shame this seems like a big deal to me. In reality it should simply mean an interaction between two civilized adults just went down. But since this is a unicorn, I felt it worth sharing my congratulations. Kudos fellows…

  6. I am a firm believer in the value of market timing (trend following), but I only use it for a small slice of my portfolio (that is, I only visit the Mosque, once or twice per year…when the trend tells me to do so!)

    I suggest that you read (or skim) Gary Antonacci’s Dual Momentum, which discusses the history, math, and psychology of trend following. In summary, if you are disciplined enough to stick to it, it works. It is elegant and simple.

    Like Gasem, I am also a DFA devotee, too. The bulk of my investible wealth is in such funds, probably two-thirds, and the rest in plan vanilla index funds. There is not one true orthodoxy for investing, and we each have to find the path that works best for us.

    Over time, I realize that the Bogleheads path is perhaps not the most optimal, but it’s good enough, and that’s the direction of most new money.

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      There’s a pendulum swing experience that I’m beginning to recognize in myself and other bloggers who recently joined “the movement” wherein early enthusiasm brings you to the forefront as a standard-bearer for an orthodoxy you’ve embraced completely. After a while, you realize that more sophisticated investors are less fundamentalist in their approach to investing, and often have multiple vehicles on several of Taylor Larimore’s proverbial “roads to Dublin” to ensure their cargo has the best chance of arrival at the final destination.

      This post, and WCI’s response, have been enlightening to say the least. Thanks for the reading recommendation and for sharing your investing strategy.

      Bogleheads is often the false summit on a long trek to a peak whose location we can only guess at.

      With gratitude,


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