February 23, 2010
Now, realistically Schreiner would be publicly flogged if he just left all his guaranteed winning portfolios in cash. So to give the appearance of not just exploiting the stacked deck of a bet no passive manager could win, he participates in the markets. He doesn’t need any timing or skill to make sure he wins the bet. Schreiner could just copy the Wealthcare Growth Portfolio that Bogle chose in the same proportion, except he will hold 5% cash. That is a guaranteed winner too because his daily standard deviation will be lower. Other choices for Schreiner to win would be to replicate the portfolio exactly for most of the time, but use cash in the last month, which with the rule he chose of daily standard deviation will guarantee Schreiner a win once again regardless of what the returns are in the last month. If the markets decline in the last month, he will end up with higher return AND less risk and he will be able to claim he is a skillful market timer and “controls risk” with his active strategy. If the markets go up the last month, he will have a lower return but will win because he will still have less daily standard deviation. How naïve does Schreiner think passive managers are? Who would be dumb enough to take this sucker bet?
If Schreiner is so confident in his “skill” (I have to admit he is skillful at shell games as most active activists are), why not reverse the rules and see if he is willing to bet that his active portfolio will produce BOTH higher returns AND less risk like he requires of passive managers in the bet against him? Are you up for that? At least that would be a fairer bet because the passive portfolio is restricted from playing the games that Schreiner could use to guarantee a win. Does the passive portfolio get to rebalance? According to the rules of his shell game, it appeared that they do not. I’m not aware of any passive managers that argue for never rebalancing.
In 2008, I invited Warren Buffett to a $2 Million Charity Investment Challenge (along with 19 other active activists) when I was writing Stop the Investing Rip-off. It is mentioned in the beginning of the book and was published last spring by John Wiley & Sons. The original letter I sent to Buffett is available here.
The problem with all of those that have copied the original Buffett bet that he made with Protégé Partners (Buffett bet on an index fund by the way) is that they focus on percentage returns. Higher percentage returns may not necessarily produce more dollars of wealth. In Schreiner’s case, he added risk, but lower risk doesn’t necessarily mean more dollars of wealth, despite a higher return.
Here’s a simple example of how a higher return, or a higher return with less risk can end up producing less dollars of wealth for an investor that is saving $2,000 a year.
| 2 Year Compound Return | Risk (SD) | $ Profit | |
| A | 8.30% | 9.19% | $386 |
| B | 7.47% | 3.53% | $510 |
| C | 8.00% | 0.00% | $492 |
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