Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Old 10-27-2009, 09:40 AM   #61
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
FinanceDude's Avatar
 
Join Date: Aug 2006
Posts: 12,484
Quote:
Originally Posted by smjsl View Post
You do mention additional possible explanation for "poor" performance of indexes, i.e. the style drift. That's an interesting thought.
Here's an even more interesting thought. Take the S&P 500 index. Is it really a pure index? The answer is no. Why? Because a committee decides which stocks are added and dropped, etc. In effect, that IS a form of active management........
__________________

__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)


This Thread is USELESS without pics.........:)
FinanceDude is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 10-27-2009, 12:04 PM   #62
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,616
Quote:
Originally Posted by Animorph View Post
I haven't seen a study that says indexing beats all active funds over any long period of time.
It is fine to favor one or the other approach, but the data is nowhere near conclusive as far as I'm concerned.
And you never will. There'll always be a Warren Buffett tap-dancing just outside the bell curve.

Is your point proved? 60+ posts later, are you happy now? Feeling better?

The point that was lost about 59 posts ago is whether active management is worth the extra effort (assuming that everyone can execute on their effort) and whether it's worth the extra expense/risk of loss. 1-2% in fees sounds like a bargain when you beat the index by 3%. It's not so much of a deal with you lag by 2%. And it's an even worse deal when you realize that volatility has reduced your APY below that of boring index funds.

The point of the passive indexers, though, is that it's a heckuva lot of work to even find that winner-- and then it's even more work to keep ahead of the crowd of "Money" magazine & M* readers racing from winner to winner. My biggest frustration was needing to find a new winner every few years as fund bloat turned them into "shows" or "places". Picking a winner isn't too hard. As Bill Miller's diehard fans have learned, picking a winner every time is a daunting challenge.

Ellis has a great description in "Winning the Loser's Game". We can't all be ace tennis players with flawless kill shots, but most of us can keep the volley going until something else (outside of our control) happens to end the game. He's not saying that the game is for losers-- he's saying that the object of the game is to avoid losing. Avoid mistakes and keep the ball in play for as long as you can. Don't try for the kill shot if it only works 6/10 times and the other four could lose you the game. It's a lot easier to avoid losing when you're choosing passive investments.

In the 1990s, Bernstein took on an active investor named Pony Express Bob over at FundAlarm.com. Bob's tactic was to rank mutual funds by monthly performance and to choose the ones with accelerating improvement (momentum). Despite short-term trends and trading fees and taxes, over the period of the competition (a few months? a year?) he was able to trounce Bernstein's index asset-allocation strategy. This was short term and it was the late 1990s and no comparison was done to 2001-2 or 2008-9, but active management again beat the "professionals". Bernstein then went on to write an article where he said that he'd rather have a life than an active investment strategy. As far as I know, Bob's tactic is still working-- perhaps because it's not as widely followed as it could be.

So choose active investment if it suits your temperament. Stay passive if that suits your temperament better. But a little tolerance goes a long way. Don't insist that one of the two strategies is "right" or "better" just because it happens to be working over your investing lifespan, or if it suits your temperament.
__________________

__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Old 10-27-2009, 12:16 PM   #63
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
Quote:
Originally Posted by Nords View Post
So choose active investment if it suits your temperament. Stay passive if that suits your temperament better. But a little tolerance goes a long way. Don't insist that one of the two strategies is "right" or "better" just because it happens to be working over your investing lifespan, or if it suits your temperament.
Absolutely.
__________________
Animorph is offline   Reply With Quote
Old 10-29-2009, 10:27 PM   #64
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,261
Quote:
Originally Posted by smjsl View Post
I guess I am still struggling with the idea that "more work = worse results" which is counter-intutitive to everything else in life. In other words, the idea that the work of trying to select good talent produces worse results than going with average would be considered nonsense in any other field.
That is a very interesting way to look at it, and I think it explains why so many people expect an "expert" to do better than average. Seems reasonable, but...

Think about what the "expert" has to do to be above average. An "expert" could be expected do a reasonable (not perfect) job to identify above average companies that are able to reliably execute their business plan, have strong management and financials and identify sectors poised for above-average growth. And to put those two together.

but that's not enough, you need to 'know'...

That the company is not overvalued currently, relative to that expected growth (if that growth is already factored into the stock price, there won't be such a big spike for just performing as expected). And if the growth does occur, that the company will be correctly valued at that time, so that you can take advantage of the expected exceptional rise in the stock price. See the conundrum? You count on it to be undervalued at one point, and overvalued at another, and you hope those co-incide with your vision of the sector direction.

And of course, that growth depends on forecasts not only being correct (many unforeseen things happen to companies and their competition), but more correct than the market on average has already assigned to those companies (current stock prices anticipate future growth). So it really goes from evaluating companies, sectors, and their strength/weaknesses, to more of a case of predicting the future better than the rest of the market. Back to Crystal Ball territory. Then drag it all down by fees.

So I don't think an "expert" financial person can pick above average stock opportunities any better than an expert meteorologist could tell me which of two cities with a historical 10% chance of rain on June 15th over the past thirty years will have a better chance of having rain on June 15th, 2011. They may be experts, but that only goes so far.

I do think there are times when it seems pretty obvious that some kind of "tulip-mania" has driven a stock price higher than is reasonable*, but you have to hope the rest of the world comes to its senses before the general market passes it by. I don't think those occur often enough and with enough certainty to keep enough money working. I think we would see consistent over-performance if that was the case.

* you know, like GOOG at 250 , or AAPL at 75 ridiculous prices!

-ERD50
__________________
ERD50 is online now   Reply With Quote
Anyone have a link to this info?
Old 10-29-2009, 10:41 PM   #65
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,261
Anyone have a link to this info?

BTW, my Googling failed me - I was looking to find a report from 1998 on the top funds with the best 10 year records - too much noise. Did *those* funds do better than the market from 1998-2008?

Just glancing at the current top ten list, they all seem to be heavily weighted in specific sectors that did better than the market. I would not bet that those will do better than the market for another ten years.

I'd actually be more interested in funds that did a little better (after expenses) than the market. That might actually be an edge that could be attributed to talented management (if there is such a thing) in some cases. But I think the top ten were more likely in the right place at the right time just due to the nature of the fund, and will not be repeated (might even be a contrary indicator).

-ERD50
__________________
ERD50 is online now   Reply With Quote
Old 10-29-2009, 11:28 PM   #66
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Just a couple of quick comments on this subject........

The performance of an index is NOT necessarily the "average" performance for that category. Some have been refering to index performance as the "average." Not necessarily so.

There is indexing and then again, there is indexing. My favority "index" is TSM which I purchase via VTI, the Vanguard TSM fund or the Schwab TSM fund. Others prefer slice and dice indexing with the small cap index, mid cap index, large cap index, value index, growth index and so on and so forth.

Few actively managed funds give free reign to managers. Most operate within constraints spelled out in the prospectus. So you're not only picking a manager, you're picking a sector, category or market cap qualifier.

It confuses the hell out of an ole boy like me......... so I go predominantly for TSM for my domestic equity exposure. Or sometimes balanced funds which actively rebalance two or more indexes.

Now, on the fixed side, it's another story..........
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Old 10-30-2009, 12:07 AM   #67
Thinks s/he gets paid by the post
 
Join Date: Jan 2004
Posts: 2,049
Quote:
Originally Posted by ERD50 View Post
BTW, my Googling failed me - I was looking to find a report from 1998 on the top funds with the best 10 year records - too much noise. Did *those* funds do better than the market from 1998-2008?
02/02/98 TABLE: The A-List

A crude and quick analysis of 1998-2008 NAV gives us:

AARP Growth and Income - can't locate symbol
Am. Century Equity Growth (BEQGX): +10%
Am. Cent. Income and Growth (BIGRX): +13%
American Mutual (AMRMX): -3%
Babson Value (BVALX): Closed
Caldwell & Orkin (COAGX): +33%
Dean Witter European Growth (EUGBX): +27%
Dodge Cox Balanced (DODBX): +22%
[...]
Janus Balanced: +60%
[...]
Scudder Growth & Income(SCDGX): -34%
[...]
Third Avenue(TAVFX) :+87%


compared to...
VTSMX: +57%
VFINX: +32%
__________________
eridanus is offline   Reply With Quote
Old 10-30-2009, 09:21 AM   #68
Recycles dryer sheets
bamsphd's Avatar
 
Join Date: Nov 2005
Posts: 337
Quote:
Originally Posted by ERD50 View Post
Think about what the "expert" has to do to be above average.
In my experience, the hardest thing an "expert" has to do is to be a contrarian to the market as a whole, while still being someone I personally agree with enough to give them my money. In my past, when I have agreed with portfolio managers, it seems like we have usually both been wrong. Though I'll freely admit I don't have anything like scientific data to support my admittedly very fallible memory.
__________________
bamsphd is offline   Reply With Quote
Old 10-30-2009, 08:00 PM   #69
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Gone4Good's Avatar
 
Join Date: Sep 2005
Posts: 5,381
Quote:
Originally Posted by smjsl View Post
I guess I am still struggling with the idea that "more work = worse results" which is counter-intutitive to everything else in life.
But at the same time you probably wouldn't struggle with the idea that someone who invested a lot of time and money to investigate "winning lottery numbers" would produce worse results than someone who just went with the quick pick (or didn't bother to play at all).

Win The Lotto - Home Page
__________________
Gone4Good is offline   Reply With Quote
Old 10-30-2009, 10:10 PM   #70
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,261
Quote:
Originally Posted by eridanus View Post
Thanks, I'll dig a bit deeper into that a bit later. One needs to compare total returns as divs can change the picture quite a bit, and that takes a bit more work than NAV.

Quote:
Originally Posted by youbet View Post
Just a couple of quick comments on this subject........

The performance of an index is NOT necessarily the "average" performance for that category. Some have been refering to index performance as the "average." Not necessarily so..
Yes, I guess "average" isn't the right term. You can look at an index as a benchmark, and even that has some fuzziness, depending how you define the category. Whether it ends up being "average" or not depends on how the other funds in the category do relatively.

But for an investor, about the only "sure thing" is that if they buy an index in a category that fits their comfort zone, that index is reasonably expected to track that category (minus expenses and +/- some statistical drift). If you pick an active fund, it's tough to say if it will outperform or under-perform.

-ERD50
__________________
ERD50 is online now   Reply With Quote
Old 10-30-2009, 11:35 PM   #71
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Quote:
Originally Posted by ERD50 View Post
But for an investor, about the only "sure thing" is that if they buy an index in a category that fits their comfort zone, that index is reasonably expected to track that category (minus expenses and +/- some statistical drift). If you pick an active fund, it's tough to say if it will outperform or under-perform.

-ERD50
Sorta...... Actually an index fund tracks itself, that is, its namesake underlying index, not a "category." SPY tracks the Standard and Poors 500. But it resides in the "large blend" category as do many actively managed funds as well as similar index funds such as VTI. So I guess if you bought an actively managed fund that fit best into the "large blend" category, you could then watch and see how it did vs. other funds in "large blend" including SPY.

I'm probably confusing myself here......

SPY tracks the S and P 500 index as that index is defined. SPY is in the large blend category but doesn't target tracking the "category."

Yep, I'm confusing myself. No wonder I focus the bulk of my domestic equity investments in VTI (or equivalent) and let 'er ride.
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Old 10-31-2009, 10:43 AM   #72
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,261
Quote:
Originally Posted by youbet View Post
Sorta......

I'm probably confusing myself here......

Yep, I'm confusing myself. No wonder I focus the bulk of my domestic equity investments in VTI (or equivalent) and let 'er ride.

Heh-heh - I was also wondering if I was getting too deep into semantics versus the reality of what we can actually do. Does an index really make a sound if it falls in the market and no is around to hear it crash?

Our options seem to be - hire a money manager, invest in active funds (kinda the same thing), buy individual stocks, or use index funds. I think that the index approach is most likely to provide the least risk of significant under-performance for most people, but I'm always open to evidence to the contrary. Especially evidence in some form that can be replicated with a reasonable amount of effort and certainty.

-ERD50
__________________
ERD50 is online now   Reply With Quote
Old 10-31-2009, 12:10 PM   #73
Thinks s/he gets paid by the post
DblDoc's Avatar
 
Join Date: Aug 2007
Posts: 1,224
Quote:
Originally Posted by ERD50 View Post
Heh-heh - I was also wondering if I was getting too deep into semantics versus the reality of what we can actually do. Does an index really make a sound if it falls in the market and no is around to hear it crash?

Our options seem to be - hire a money manager, invest in active funds (kinda the same thing), buy individual stocks, or use index funds. I think that the index approach is most likely to provide the least risk of significant under-performance for most people, but I'm always open to evidence to the contrary. Especially evidence in some form that can be replicated with a reasonable amount of effort and certainty.

-ERD50
If such evidence ever came to light how long do you think it would take before it would no longer be useful as everyone knows about it? The Efficient Market Hypothesis may not be everything everyone wants it to be but it WILL make short work out of any discovered advantages...

DD
__________________
At 54% of FIRE target
DblDoc is offline   Reply With Quote
Old 10-31-2009, 01:04 PM   #74
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,261
Quote:
Originally Posted by DblDoc View Post
If such evidence ever came to light how long do you think it would take before it would no longer be useful as everyone knows about it? The Efficient Market Hypothesis may not be everything everyone wants it to be but it WILL make short work out of any discovered advantages...

DD
Well, I am an indexing fan, so I tend to agree. But I do try to keep an open mind to the possibility. And I think it is possible (though not likely) for such an imbalance to exist and persist.

People buy lottery tickets, and that is certainly a bad financial decision that gives an advantage to the seller. I think there may be other areas where there is an investment edge, but investors may have reasons (rational or irrational) to avoid them, allowing the advantage to persist.

Possibly .

-ERD50
__________________
ERD50 is online now   Reply With Quote
Old 10-31-2009, 01:25 PM   #75
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
I think the market can look mispriced at times to investers with particular styles.

People invest for different reasons. Short versus long term, or growth versus value are a few. Since the market is a mix of all investors, it certainly could be true that one of these investors would see a mispricing by his or her own measures that would persist for a significant period. Certainly during the market bottom, short term thinking seemed to dominate long term. The market seemed awfully cheap to me for the long term, though in the short term I had no idea where it would go next.

Not every investor holds a stock until the company finally folds and the entire cash stream from that stock ends, the really long term approach. So what is the actual value of that stock to those who invest for shorter terms? And is that value the same for all types of investors?
__________________
Animorph is offline   Reply With Quote
Old 10-31-2009, 03:16 PM   #76
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Quote:
Originally Posted by ERD50 View Post
Our options seem to be - hire a money manager, invest in active funds (kinda the same thing), buy individual stocks, or use index funds.-ERD50
I think you're oversimplifying "invest in index funds." (Why keep anything simple?)

There is a big difference between putting your domestic equity investments into VTI and letting it ride vs using a mix of index funds focusing on subsets of the total market and trying to time the market (rebalancing on steroids).

Whenever someone tells me they are an "indexer" I'm always curious if that means they're a TSM buy and hold type or someone who owns many index funds or ETF's and is an aggressive rebalancer shifting category allocation percentages frequently.

We seem to have both types here.
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Old 10-31-2009, 04:47 PM   #77
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Gone4Good's Avatar
 
Join Date: Sep 2005
Posts: 5,381
Quote:
Originally Posted by youbet View Post
Whenever someone tells me they are an "indexer" I'm always curious if that means they're a TSM buy and hold type or someone who owns many index funds or ETF's and is an aggressive rebalancer shifting category allocation percentages frequently.
There are reasons to own something other than a TSM index even if you're not a closet market timer. You may, for example, want a riskier asset mix than the TSM provides to try to capture the higher expected returns. Overweighting small caps gives you that. Also, overweighting something like REITs that have had lower correlation with the overall market has portfolio benefits.
__________________
Gone4Good is offline   Reply With Quote
Old 10-31-2009, 06:50 PM   #78
Recycles dryer sheets
 
Join Date: Sep 2009
Posts: 353
Quote:
Originally Posted by ERD50 View Post
So I don't think an "expert" financial person can pick above average stock opportunities any better than an expert meteorologist could tell me which of two cities with a historical 10% chance of rain on June 15th over the past thirty years will have a better chance of having rain on June 15th, 2011. They may be experts, but that only goes so far.
Quote:
Originally Posted by . . . Yrs to Go
But at the same time you probably wouldn't struggle with the idea that someone who invested a lot of time and money to investigate "winning lottery numbers" would produce worse results than someone who just went with the quick pick (or didn't bother to play at all).
Well, here comes the usual response to both of these: Buffet, Lynch, maybe even Cramer (if you believe his claimed record), etc. I don't know of any known "experts" in picking lottery numbers. If you believe these guys were just the lucky ones with no inherent skill, then there is nothing else I can say. If you believe they DID have extra skill to put them far over the top, which I tend to believe, then I'd argue there is not just those "well-known" ones and dummies. Instead, there is probably a whole spectrum of more and less skillful money managers. The issue is can you identify the more skillful ones before their funds are closed or they go into retirement. I don't know.
__________________
smjsl is offline   Reply With Quote
Old 10-31-2009, 08:02 PM   #79
Thinks s/he gets paid by the post
DblDoc's Avatar
 
Join Date: Aug 2007
Posts: 1,224
Quote:
Originally Posted by ERD50 View Post
Well, I am an indexing fan, so I tend to agree. But I do try to keep an open mind to the possibility. And I think it is possible (though not likely) for such an imbalance to exist and persist.

People buy lottery tickets, and that is certainly a bad financial decision that gives an advantage to the seller. I think there may be other areas where there is an investment edge, but investors may have reasons (rational or irrational) to avoid them, allowing the advantage to persist.

Possibly .

-ERD50
Such as cheap index funds/ETF's that allow the investor to create a balanced, diversified portfolio that manages risk and incurs low fees. Shhhh! Don't let that secret out .

DD
__________________
At 54% of FIRE target
DblDoc is offline   Reply With Quote
Old 10-31-2009, 08:11 PM   #80
Thinks s/he gets paid by the post
DblDoc's Avatar
 
Join Date: Aug 2007
Posts: 1,224
Quote:
Originally Posted by smjsl View Post
Well, here comes the usual response to both of these: Buffet, Lynch, maybe even Cramer (if you believe his claimed record), etc. I don't know of any known "experts" in picking lottery numbers. If you believe these guys were just the lucky ones with no inherent skill, then there is nothing else I can say. If you believe they DID have extra skill to put them far over the top, which I tend to believe, then I'd argue there is not just those "well-known" ones and dummies. Instead, there is probably a whole spectrum of more and less skillful money managers. The issue is can you identify the more skillful ones before their funds are closed or they go into retirement. I don't know.
Well Buffet runs a corporation - he is not an investment manager. Cramer is an entertainer, his stock picks appear to be mostly momentum plays that quickly sour. That leaves Lynch. Maybe he was as good as proponents of active management believe, but as you point out you would have to recognize that early in his carrier in order to take advantage. I know that I can't so I moved on to an investment strategy that I can understand and doesn't rely on someone else.

DD
__________________

__________________
At 54% of FIRE target
DblDoc is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Active vs passive equity investing MichaelB FIRE and Money 13 06-21-2009 09:07 AM
More evidence from the Active-Passive debate ats5g FIRE and Money 11 10-03-2008 08:47 PM
More to passive investing that just ER... mickeyd FIRE and Money 0 04-13-2008 11:46 AM
(FAQ archive): Invididual Stocks vs. Funds/Active Funds vs. Passive Funds Nords Early Retirement FAQs 0 10-22-2007 04:07 PM
Active management for free with Edgar lazyday FIRE and Money 7 04-05-2005 05:21 AM

 

 
All times are GMT -6. The time now is 07:28 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.