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Old 05-06-2008, 05:22 PM   #41
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I don't expect to change your mind, ArtG, but I believe you are wrong.

To restate my basic position (and it s one held by many others): Sure, some managed funds will outperform their relevant indexes. It's got to be that way. However, very (very) few will outperform their indexes on a risk-adjusted basis over a period of years. In fact, the number which do so is what would be predicted by random chance. An investor's ability to predict which managed funds will outperform, and when they will stop, is no better than chance. Thus, it is not worth paying the extra expenses of a managed fund.
**************************
"In a study of equity mutual funds, Elton, Gruber, Hlavka and Das examine all funds that existed for the period of 1965-1984, 143 funds in all. These funds are compared to the set of index funds—big stocks, small stocks and fixed income—that most closely correspond to the actual investment choices made by the mutual funds. The result: on average these funds underperform the index funds by a whopping 159 basis points a year. Not a single fund generated positive performance that was statistically significant. In the most recent and comprehensive study done to date, a dissertation at the University of Chicago, Mark Carhart studies a total of 1,892 funds that existed any time between 1961 and 1993. After adjusting for the common factors in returns, an equal-weighted portfolio of the funds underperformed by 1.8% per year." (from a speech by Rex Sinquefeld, link below)
*****************
So, these fund managers, who spend all their days trying to beat the market with the benefit of millions of dollars of resources can't consistently do it. But, somehow, an investor is supposed to believe he can discern the most talented ones, the ones who will be successful despite all the odds? And this investor is supposed to have enough faith in the strength of his prediction that he is willing to plunk down his retirements savings based on this judgement? And, be charged .5% to 2% each year for that privilege?

Anecdotes of one person or another person's experience are largely immaterial. My cousin won the lottery--does that mean he is a skilled lottery player? Does it mean I should pick the same numbers he picks? Does it mean playing the lottery is a good idea?

Fact: Most managed funds in most categories underperform their relevant index most years.

If you are interested in some good reading on the subject, I recommend:

- The book "Bogle on Mutual Funds"
- The article at:"Active vs. Passive Management
(Rex Sinquefeld's quote above came from this piece.)
- The book "The Intelligent Asset Allocator" (William Bernstein)

But, I am happy that there are stock pickers and those who believe that active management of mutual funds is worth the cost. The activities of these individuals is what keeps the market efficient, and what allows indexing to work.

It is worth noting that most people who now believe in passive management/indexing once believed as you do now. I used to. Then, I got this little thingy installed in my head . . .
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Old 05-06-2008, 08:47 PM   #42
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LOL! I was referring to your article. Did you even read your own article?
Yes, I did. It doesn't appear that you did though. And I quote [From 1973-2003]:

Quote:
While it outpaced the market by 0.7% (14.5% vs. 13.8%) for the period, after adjusting for the sales charge, it fell slightly behind, with a net annual return of 13.7%.
And in case you're a visual learner:




- Alec
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Old 05-07-2008, 09:34 AM   #43
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Yes, I did. It doesn't appear that you did though. And I quote [From 1973-2003]:

And in case you're a visual learner:




- Alec
Well I quoted directly from your article also, and if you note, that box above is dated 1978-2003. Not 1973-2003 as we were discussing.
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Old 05-07-2008, 09:43 AM   #44
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I don't expect to change your mind, ArtG, but I believe you are wrong.

To restate my basic position (and it s one held by many others): Sure, some managed funds will outperform their relevant indexes. It's got to be that way. However, very (very) few will outperform their indexes on a risk-adjusted basis over a period of years. In fact, the number which do so is what would be predicted by random chance. An investor's ability to predict which managed funds will outperform, and when they will stop, is no better than chance. Thus, it is not worth paying the extra expenses of a managed fund.
**************************
"In a study of equity mutual funds, Elton, Gruber, Hlavka and Das examine all funds that existed for the period of 1965-1984, 143 funds in all. These funds are compared to the set of index funds—big stocks, small stocks and fixed income—that most closely correspond to the actual investment choices made by the mutual funds. The result: on average these funds underperform the index funds by a whopping 159 basis points a year. Not a single fund generated positive performance that was statistically significant. In the most recent and comprehensive study done to date, a dissertation at the University of Chicago, Mark Carhart studies a total of 1,892 funds that existed any time between 1961 and 1993. After adjusting for the common factors in returns, an equal-weighted portfolio of the funds underperformed by 1.8% per year." (from a speech by Rex Sinquefeld, link below)
*****************
So, these fund managers, who spend all their days trying to beat the market with the benefit of millions of dollars of resources can't consistently do it. But, somehow, an investor is supposed to believe he can discern the most talented ones, the ones who will be successful despite all the odds? And this investor is supposed to have enough faith in the strength of his prediction that he is willing to plunk down his retirements savings based on this judgement? And, be charged .5% to 2% each year for that privilege?

Anecdotes of one person or another person's experience are largely immaterial. My cousin won the lottery--does that mean he is a skilled lottery player? Does it mean I should pick the same numbers he picks? Does it mean playing the lottery is a good idea?

Fact: Most managed funds in most categories underperform their relevant index most years.

If you are interested in some good reading on the subject, I recommend:

- The book "Bogle on Mutual Funds"
- The article at:"Active vs. Passive Management
(Rex Sinquefeld's quote above came from this piece.)
- The book "The Intelligent Asset Allocator" (William Bernstein)

But, I am happy that there are stock pickers and those who believe that active management of mutual funds is worth the cost. The activities of these individuals is what keeps the market efficient, and what allows indexing to work.

It is worth noting that most people who now believe in passive management/indexing once believed as you do now. I used to. Then, I got this little thingy installed in my head . . .
Sam, I appreciate your thoughts, however, this is what I think is continually getting lost in the discussion. We are not talking about the average mutual fund vs the index, we are speaking about a particular fund which has already proven to have beaten that same index year after year. Hence, we are not picking lottery numbers for a one time hit, nor are we trying to pick that needle out of a haystack, we are doing exactly what you are asking for....using historical facts and basis to pick those funds that HAVE outperformed on numerous occasions.
If you're going to state your reason for buying the index, that the index has outperformed most funds over time, then why in the world wouldn't you use that same reason for selecting those funds that haven't?
If I go to my favorite restaurant for a steak dinner every anniversary because it has always been consistently a great meal, why would I avoid next year because it may not be?
I swear, I'm trying to find some sort of relative comparisons that just might hit home with some people.
How about this one, I've been happily and faithfully married to my wife for twenty-six years now, should she now assume this is the year I start cheating on her because there's no way we can keep up this streak?
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Old 05-07-2008, 10:54 AM   #45
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How about this one, I've been happily and faithfully married to my wife for twenty-six years now, should she now assume this is the year I start cheating on her because there's no way we can keep up this streak?
ROTFLMAO!!!
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Old 05-07-2008, 11:29 AM   #46
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I'm happy with my hamburger but you think I could get a better DH?
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Old 05-07-2008, 11:34 AM   #47
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I'm happy with my hamburger but you think I could get a better DH?
Well if you've been settling for the average DH, then you may be able to do better. Of course, you could do worse. I'd check out the history of the potential DH in question to see if he's a decent provider and doesn't believe in physical abuse. Of course, this is no guarantee that he won't beat you in the future.
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Old 05-07-2008, 05:02 PM   #48
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We are not talking about the average mutual fund vs the index, we are speaking about a particular fund which has already proven to have beaten that same index year after year. Hence, we are not picking lottery numbers for a one time hit, nor are we trying to pick that needle out of a haystack, we are doing exactly what you are asking for....using historical facts and basis to pick those funds that HAVE outperformed on numerous occasions.
I do understand your position (that by analyzing past performance, you can determine which managed funds are likely to outperform in the future), and I even understand why many people believe this. I just no longer believe this myself anymore.
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Old 05-07-2008, 05:52 PM   #49
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I've been happily and faithfully married to my wife for twenty-six years now
As far as you know...
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Old 05-07-2008, 10:25 PM   #50
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Well if you've been settling for the average DH, then you may be able to do better. Of course, you could do worse. I'd check out the history of the potential DH in question to see if he's a decent provider and doesn't believe in physical abuse. Of course, this is no guarantee that he won't beat you in the future.
Dr. Phil tells me that past performance IS a reliable indicator of future behavior--but only for people.
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Old 05-07-2008, 10:40 PM   #51
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I have a hard time taking seriously anything that a fat guy with a diet book has to say...

I'm at this time reminded of the semi funny bit about the problems with persistence. That a crack team of experts took regular and detailed examinations of president bush over the last 7.5 years. At every measure he was alive and president of the US.

They therefore surmised that he was immortal and would always be president.

Soooooooo...
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Old 05-07-2008, 10:46 PM   #52
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Yeah, even Oprah is over Dr. Phil. But even Dr. Phil didn't apply the past performance mantra to the stock market.
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Old 05-07-2008, 10:52 PM   #53
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Shhh...thats in his next book! As soon as he's done with Britney!
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Old 05-08-2008, 06:35 AM   #54
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We are not talking about the average mutual fund vs the index, we are speaking about a particular fund which has already proven to have beaten that same index year after year. ..

If I go to my favorite restaurant for a steak dinner every anniversary because it has always been consistently a great meal, why would I avoid next year because it may not be?
I swear, I'm trying to find some sort of relative comparisons that just might hit home with some people.
How about this one, I've been happily and faithfully married to my wife for twenty-six years now, should she now assume this is the year I start cheating on her because there's no way we can keep up this streak?
LOL at the analogies, and I think there is some truth to what you say.

I am not a fan of the efficient market theory, best case markets are weakly efficient. But when the value of company changes by 10% over night when the company missed earning estimates by a penny, or the value of 50 year old companies goes down 50% for the first 6 months and then triples over the rest of year, I can't believe the market is particularly rational.

I think investing in general and stock picking in particular is a skill and some people are much better than other. I think that skill extends to people not named Buffett, Lynch, or Bill Gross. Some of these people (or computer programs) work for mutual funds. So I think is possible for some money managers to beat the market over long periods (i.e. achieve Alpha) even counting the additional expenses associated with trading.

The problem for me is I think the structure of mutual funds make them a lousy way to try and achieve over average returns.

First of all while I think stock picking is a skill and over the long-term good stock pickers will make more money than bad ones. Luck plays a huge factor, or timing is everything. You can do the most sophisticated fundamental analysis or sharpest technical analysis but if a hurricane hits or the price corn takes off the guy who had a gut feel to do the opposite looks like the genius. So the first hurdle is establishing a track record where you can be reasonable sure that a money manager success is based on skill and not on luck. It seems to me 5 years is minimum and 10 years is prefered (to see a bull and bear market.) to figure this out.

After 10 years the secret is out and lots of money will be rushing to the fund. So if even the manager is really skilled it is harder to beat the market running a 15 billion fund than a $1 billion. This is my biggest problem with most of the American fund family and to some extent DFA.

The biggest issue to me is that the real competitive advantage/secret sauce to a mutual fund is the people and/or computer program and I as outside investor have little insight. Sure we know the name of the fund manager and his/her tenure, but maybe that isn't why the fund did well over the last 5 years. Maybe the real alpha of the fund consisted of two very bright recent MIT grads, who tweaked a trading program, and they've gone on to greener pasturers.

In someways, I think you have a better chance of achieving above average returns by finding a great broker and letting him buy individual stocks. Over course you also have a excellent chance of losing your shirt with this approach.

To go back to the anniversary steak analogy, let me ask Art the opposite question, if you went back one year and the steak was horrible would you still go back the next year? how many years of bad steak would it take before you determined that you'd need to find a new steakhouse?

Several years ago a 3 gay friends of mine opened a Thai/Pacific restaurant.
The food was fantastic and it opened to rave reviews and quickly became the It spot, complete with multi page newspaper and magazine articles. This lasted for about year or so , then the gay couple broke up, and this hurt the service. Next the Parisian trained terrific chef started drinking, and finally he died in a tragic accident. Outwordly the place remains the same, same charming host, menu, decor. But now it is just an average Thai restaurant on the expensive side. After 1/2 dozen not great meal over 6 months, I basically stop going. But I still run into out of town people who come to Hawaii two to three times a year, they remember its terrific past performance, and still go hoping for an awesome meal. I wonder at one point will the figure out that they didn't go there on a off night.

It seems to me that active mutual funds are pretty similar. It takes time to figure out ones are really good and not just lucky, but it is even harder to figure out when they stop being special..
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Old 05-08-2008, 08:49 AM   #55
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Dr. Phil tells me that past performance IS a reliable indicator of future behavior--but only for people.
Are mutual fund managers people?
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Old 05-08-2008, 09:19 AM   #56
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LOL at the analogies, and I think there is some truth to what you say.

I am not a fan of the efficient market theory, best case markets are weakly efficient. But when the value of company changes by 10% over night when the company missed earning estimates by a penny, or the value of 50 year old companies goes down 50% for the first 6 months and then triples over the rest of year, I can't believe the market is particularly rational.

I think investing in general and stock picking in particular is a skill and some people are much better than other. I think that skill extends to people not named Buffett, Lynch, or Bill Gross. Some of these people (or computer programs) work for mutual funds. So I think is possible for some money managers to beat the market over long periods (i.e. achieve Alpha) even counting the additional expenses associated with trading.

The problem for me is I think the structure of mutual funds make them a lousy way to try and achieve over average returns.

First of all while I think stock picking is a skill and over the long-term good stock pickers will make more money than bad ones. Luck plays a huge factor, or timing is everything. You can do the most sophisticated fundamental analysis or sharpest technical analysis but if a hurricane hits or the price corn takes off the guy who had a gut feel to do the opposite looks like the genius. So the first hurdle is establishing a track record where you can be reasonable sure that a money manager success is based on skill and not on luck. It seems to me 5 years is minimum and 10 years is prefered (to see a bull and bear market.) to figure this out.

After 10 years the secret is out and lots of money will be rushing to the fund. So if even the manager is really skilled it is harder to beat the market running a 15 billion fund than a $1 billion. This is my biggest problem with most of the American fund family and to some extent DFA.

The biggest issue to me is that the real competitive advantage/secret sauce to a mutual fund is the people and/or computer program and I as outside investor have little insight. Sure we know the name of the fund manager and his/her tenure, but maybe that isn't why the fund did well over the last 5 years. Maybe the real alpha of the fund consisted of two very bright recent MIT grads, who tweaked a trading program, and they've gone on to greener pasturers.

In someways, I think you have a better chance of achieving above average returns by finding a great broker and letting him buy individual stocks. Over course you also have a excellent chance of losing your shirt with this approach.

To go back to the anniversary steak analogy, let me ask Art the opposite question, if you went back one year and the steak was horrible would you still go back the next year? how many years of bad steak would it take before you determined that you'd need to find a new steakhouse?

Several years ago a 3 gay friends of mine opened a Thai/Pacific restaurant.
The food was fantastic and it opened to rave reviews and quickly became the It spot, complete with multi page newspaper and magazine articles. This lasted for about year or so , then the gay couple broke up, and this hurt the service. Next the Parisian trained terrific chef started drinking, and finally he died in a tragic accident. Outwordly the place remains the same, same charming host, menu, decor. But now it is just an average Thai restaurant on the expensive side. After 1/2 dozen not great meal over 6 months, I basically stop going. But I still run into out of town people who come to Hawaii two to three times a year, they remember its terrific past performance, and still go hoping for an awesome meal. I wonder at one point will the figure out that they didn't go there on a off night.

It seems to me that active mutual funds are pretty similar. It takes time to figure out ones are really good and not just lucky, but it is even harder to figure out when they stop being special..
You make some great discussion points here, and I'll try to answer some of them.
First off, understand that I have lunched with many, many mutual fund managers at several mutual fund companies, and I've had the opportunity to grill some of these guys on their strategies and stock picking methods. I've met some who were very cocky, and ultimately run out of the business, and some who spoke so far over my head that I just took their word for it that their strategy made sense. However, I've never met with another fund company like American Funds, when it comes to their stock selection methods. Unlike Fidelity who hires bright young kids out of college with little experience, American Funds managers have an average time on job of 23 years. These people are some of the most boring and down to earth you will ever meet, and you'd never suspect these people of being worth millions. To answer your question of how they handle taking in additional billiions is simple, they don't. American Funds does not have any single manager funds. They are totally a team effort and what happens is, if necessary, one of their analysts will get the opportunity to become a manager, and HE or SHE will take on the money as if it is their own separate account. Each works independently, however, when the time comes to sell a fund, it is first offered to all other managers if they'd like to add to their position.
The selection method of picking stocks is unlike any other I've ever seen. Before buying ANY stock, they go to that company directly and spend three weeks at their HQ going through the books, and observing day to day operations. So, they're not reading charts or studying fundamentals from afar. IF they buy a stock, it's with the commitment to hold it for at least one year, and if they wish to sell early, they must present the reason. I swear, it's the closest thing you'll ever see to a true communism type environment, as everyone seems to be working toward a greater good.
To get employed with the company, it takes an average of 12 interviews and even the lower level internal wholesalers are graduates of Ivy League schools. I had lunch with one girl, who was a graduate from Dartmouth and I asked her why in the world she'd want to take such a lowly job considering her degree. She told me she had this same discussion with her father, but if you get in with this company, the opportunities to a secure retirement are incredible, and each employee seems to grasp this.
It's probably one of the greatest companies no one knows about (the other is Lincoln Electric).
Anyway, not to be a commercial for them, but I also at one time was a non-believer. However, while they may not over-perform during the wild market swings, they hold up incredibly well during the market tanks, and historically, this is where the difference is made.

As to your restaurant question, IF I only go to this restaurant once a year, then after one bad meal, (I may make the manager aware and see how he handles the situation), or in the following year I will probably discuss with my spousal as to whether she'd rather try a different restaurant or give the fave another chance. If I were a regular, and quality had dropped off, I would scratch it off my list.
BTW, how is The Willows these days? Still consistently good?
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Old 05-08-2008, 09:26 AM   #57
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LOL at the analogies, and I think there is some truth to what you say.

I am not a fan of the efficient market theory, best case markets are weakly efficient. But when the value of company changes by 10% over night when the company missed earning estimates by a penny, or the value of 50 year old companies goes down 50% for the first 6 months and then triples over the rest of year, I can't believe the market is particularly rational.

I think investing in general and stock picking in particular is a skill and some people are much better than other. I think that skill extends to people not named Buffett, Lynch, or Bill Gross. Some of these people (or computer programs) work for mutual funds. So I think is possible for some money managers to beat the market over long periods (i.e. achieve Alpha) even counting the additional expenses associated with trading.
I agree, but the key word is SOME managers, not the majority........

Quote:
First of all while I think stock picking is a skill and over the long-term good stock pickers will make more money than bad ones. Luck plays a huge factor, or timing is everything. You can do the most sophisticated fundamental analysis or sharpest technical analysis but if a hurricane hits or the price corn takes off the guy who had a gut feel to do the opposite looks like the genius. So the first hurdle is establishing a track record where you can be reasonable sure that a money manager success is based on skill and not on luck. It seems to me 5 years is minimum and 10 years is prefered (to see a bull and bear market.) to figure this out.
The inherent beauty of the index model is to "but the whole darn market", which in effect "covers the bases". An index manager is always 100% invested in the market, come heck or high water. However, in a bear market, they have no place to hide..........

Quote:
After 10 years the secret is out and lots of money will be rushing to the fund. So if even the manager is really skilled it is harder to beat the market running a 15 billion fund than a $1 billion. This is my biggest problem with most of the American fund family and to some extent DFA.
I have had those concerns with American Funds for several years. However, they seem to be weathering it better than other fund families. They have been criticized for NOT closing their funds, but they believe their process of having large management teams, along with holding stocks for LONG periods of time and low expenses helps them. However, their betas are low and you don't see plummeting downsides like you do in other funds in a bear market. Also, they were about 20% in cash in 2000-2002, which they were widely criticized for. However, I had not ONE complaint from anyone about that........

Quote:
The biggest issue to me is that the real competitive advantage/secret sauce to a mutual fund is the people and/or computer program and I as outside investor have little insight. Sure we know the name of the fund manager and his/her tenure, but maybe that isn't why the fund did well over the last 5 years. Maybe the real alpha of the fund consisted of two very bright recent MIT grads, who tweaked a trading program, and they've gone on to greener pasturers.
I think alpha is tough to find. Some of the "alpha" of Peter Lynch was stock purchases based on hanging out at shopping malls and noticing traffic patterns of where women shopped. Hard to put that into an algorithim............

Quote:
In someways, I think you have a better chance of achieving above average returns by finding a great broker and letting him buy individual stocks. Over course you also have a excellent chance of losing your shirt with this approach.
That may have been the case before the Internet and broadband became vogue, but today there's a LOT of tools that the average investor has access to levels the playing field substantially.......

Quote:
It seems to me that active mutual funds are pretty similar. It takes time to figure out ones are really good and not just lucky, but it is even harder to figure out when they stop being special..
You've hit it on the head. I think it's about expectations. For instance, all of my and DW's IRA monies are in American Funds. In a bull market, a Vanguard Index fund may very well beat my return, as a matter of fact they probably will. In a bear market, my American Funds do better than probably 80% of all funds, because of their conservative management. Overall, those portfolios have a beta of .78, versus a market beta of 1.0.

I KNOW I am giving up some return, but I am content with that. In our taxable accounts, I own individual stocks and ETFs, and that's where I take risk. If our qualified monies just chug along at 7% or so, we'll have WAY more money that we need in retirement.

I submit my way of doing things probably sounds idiotic to the intelligent folks on here, but the bottom line is AF has made me a TON of money in the past 9 years, and I don't sweat a goofy market because I am confident they know what they are doing............
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Old 05-08-2008, 09:27 AM   #58
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This is a pointless argument. Art and others simply haven't reviewed the data that points overwhelmingly to the advantage of indexes. You cannot have this conversation with them - I've tried several times.

Quote:
what I think is continually getting lost in the discussion. We are not talking about the average mutual fund vs the index, we are speaking about a particular fund which has already proven to have beaten that same index year after year. Hence, we are not picking lottery numbers for a one time hit, nor are we trying to pick that needle out of a haystack, we are doing exactly what you are asking for....using historical facts and basis to pick those funds that HAVE outperformed on numerous occasions.
What you continually FAIL to understand is that performance does NOT persist. You cannot look at a 1,5,10 year record and be assured that it is a good fund. The history book is littered with fallen superstars (latest being Bill Miller). So in many ways, you are indeed looking for that proverbial needle in a haystack, and the odds are dramatically stacked against you.

Quote:
If you're going to state your reason for buying the index, that the index has outperformed most funds over time, then why in the world wouldn't you use that same reason for selecting those funds that haven't?
You have it precisely backwards. Most funds have underperformed the index, not the other way around (index outperforms most funds). Subtle but important distinction.

Quote:
Whatever, it's your returns. I just hate to see a whole group of people gathering false information from someone so closed minded.
Of everything you say, this is the one statement that gets me upset. I don't have to be open minded - I was at one point and through reason and logic have determined that active investing is a losers game. When you call us out in that manner, it leads (a whole group of) uninformed investors to think that they can 'beat the market' and that leads them to make poor decisions such as:
-market timing
-manager selection
-choosing funds based on past returns
-choosing funds based on m* rankings

How many more academic studies need there be to show you that you have much better odds betting on the outcome of a coin flipping game than picking an active fund to 'beat the market'?

To continue to promote such wrongheaded ideas in the face of massive evidence to the contrary just amazes me.
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Old 05-08-2008, 09:33 AM   #59
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The inherent beauty of the index model is to "but the whole darn market", which in effect "covers the bases". An index manager is always 100% invested in the market, come heck or high water. However, in a bear market, they have no place to hide..........
The fundamental difference between your approach and mine is that I focus on asset allocation to determine my risk level whereas you rely on the ever-shifting whims of a fund manager (market timing).

In other words, you have no control over your AA where I have precise control.

To have a meaningful comparison of stats such as beta, we need to do it across a whole portfolio - not at an individual fund level. The beta of your fund at 0.78 is a meaningless number because your fund holds 20% cash - of course it should have less beta. You can easily do that yourself by holding 80% eq and 20% cash, at MUCH lower cost. This is not rocket science.

The name of the game for me is getting the highest return (compound annual growth rate) for each unit of risk I engage in.. and there is no better way to do that (bar none) than a carefully selected portfolio of low-cost index funds.

For what its worth, I don't consider your approach 'idiotic' - selling AF is your bread and butter and to some extend you need to 'eat your own cooking'. I just think that your method of moderating your risk exposure is not cost-efficient.
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Old 05-08-2008, 09:44 AM   #60
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A couple of more links:

Market Uncertainty and the Role of Indexing: Part I

Market Uncertainty and the Role of Indexing: Part II

Myths and Misconceptions about Indexing
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