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Old 06-20-2014, 08:24 AM   #21
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The performance of active funds increased to 40% over the last five year period.. While it certainly makes sense that on average active management is going to under perform indexes.
I'm wondering how an honest marketing campaign would work for actively managed MFs. "Take a shot with us! Even in a favorable 5 year period, 60% of us do worse than a comparable unmananged index, and we're gonna charge you 1-2% every year right off the top regardless. But "managed" sounds a whole lot better than "unmanaged", right?"

It was interesting to note in the linked SPIVA report that about 1/4th of the funds had ceased to exist over the previous 5 years. I'd bet most of those were managed funds, and the lucky investors got rolled into another "we're gonna beat the averages this time" fund. (The active manager underperformance number cited in the SPIVA report accounts for survivorship bias, at least as well as they could).
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It doesn't follow that just because most funds can't beat indexes, individuals can't.
I suppose they could, but in practice they don't. On average, neither do private foundations and other non-MF active managers.

But, I agree 100% that there will always be individuals and active MF managers who beat the indexes in a particular year, and some will do it for longer.
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Old 06-20-2014, 09:32 AM   #22
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I'll throw in my 2cents on this discussion.

People discuss market efficiency like it's a binary property. The market is efficient or it isn't. One counterexample can therefore prove the hypothesis false. I think this simplifies the issue too much and instead it would be more useful to think of efficiency as a property that can be measured and quantified.

At the mutual fund level there have been a lot studies looking at market efficiency. And even the father of the EMH (Fama) did a study showing persistent manager skill (google Luck vs Skill in mutual fund returns). However the amount of skill (managers with positive alpha that couldn't be attributed to chance) was a fraction of a percent.

Clifp and others have raises some good points about why results from mutual funds may not be relevant to individual investors. One issue is that funds may need huge trading volumes and can move the market. However Fama's study did look at mutual funds with as small as $5M AUM where this shouldn't be an issue.

Recently on bogleheads there was a discussion of whether day-traders exhibit skill. Day-trading is probably not like most of the investors on this board but is an alternative result where the participants aren't hamstrung like mutual fund managers. The study did quantify the amount of inefficiency and found something like 1% were able to consistently outperform.

I haven't seen a study that looked at individual investors performance and would be *extremely* interested in this. However I wouldn't be surprised if the amount of inefficiency at the investor level was of similar magnitude.
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Old 06-20-2014, 09:56 AM   #23
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I haven't seen a study that looked at individual investors performance and would be *extremely* interested in this. However I wouldn't be surprised if the amount of inefficiency at the investor level was of similar magnitude.
Dalbar, Inc does a regular analysis of individual investor results, but most of their products are not available for free. But this source provided a quote from one of their recent studies:

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For the twenty years ending 12/31/2013 the S&P 500 Index averaged 9.22% a year. A pretty attractive historical return. The average equity fund investor earned a market return of only 5.02%.
Of course, this is an average. Those >other< dumb investors panic and sell low, get scared and won't buy low, fail to get out when there is a bubble, etc. All this is clear--in hindsight. Now, if I were picking individual stocks of course I would beat the average because I would avoid all of these mistakes and just buy the good stocks at the right price, and sell them if they get too pumped up. Right . . . .
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Old 06-20-2014, 02:52 PM   #24
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Dalbar, Inc does a regular analysis of individual investor results, but most of their products are not available for free. But this source provided a quote from one of their recent studies:



Of course, this is an average. Those >other< dumb investors panic and sell low, get scared and won't buy low, fail to get out when there is a bubble, etc. All this is clear--in hindsight. Now, if I were picking individual stocks of course I would beat the average because I would avoid all of these mistakes and just buy the good stocks at the right price, and sell them if they get too pumped up. Right . . . .

I was a dumb investor. Not a panic one, just one who thought he could be a falling knife value investor... After quitting for 10 years. I recently bought and sold Chevron at a 10% gain in one month, and have a 50% gain on Intel in a little over a year. I plan to sell soon and "retire at the the top of my game" never to buy an individual stock again. This way for the rest of my life I can say to myself I can actually be a good stock picker, I just don't want to do it.


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Old 06-20-2014, 03:06 PM   #25
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I wonder how these studies measure investor's performance. Over what periods? I do not need any study to agree that no one, absolutely no one, can beat the S&P every year 10 or 20 years in a row. To do that would require you to leverage to the hilt to beat the market when it was boiling with dotcoms, then to get out at exactly the top to avoid getting creamed. One has to be stupid reckless and lucky at the same time.

A steady and long-term value investor will trail the market in some years, but win long-term like the fabled tortoise.

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... I recently bought and sold Chevron at a 10% gain in one month, and have a 50% gain on Intel in a little over a year. I plan to sell soon and "retire at the the top of my game"...
Sure. Most people would call it quit and stop pushing their luck if they could now retire on that gain.
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Old 06-20-2014, 04:22 PM   #26
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And by the way, whether the market is efficient or not, it is the arguments that its proponents use that I have problems with.

Let's take two typical ones.

1) They say that by pure random chance, one will always have an investor that beats the market every year for 10 or 20 years in a row, similarly to "finding" a coin tosser that can land "head up" 10 or 20 times in a row. In case you are not familiar with this argument, here's how it goes.

Let's assemble several thousand people, say 2000 and ask them to toss a coin. If the coin is fair, roughly 1/2 or 1000 persons will toss "head up". Keep these and eliminate the other 1/2. Toss again, and we will eliminate another 1/2 and are down to 500 persons who toss 2 heads in a row. Keep on going and eventually we will get the person(s) who could go 10 heads in a row. And if we have a big enough sample size, we can find that person with the "ability" to toss 20 heads in a row. This proves that there's always that guy who is called skillful simply due to random chances.

So, where's the problem? It is that investment performance measurement cannot be based on annual binary comparison like the above!

Suppose we have an investor whose performance is paired with the market as shown below.
Year 1 - Market 20%, Investor 15%
Year 2 - Market 15%, Investor 12%
Year 3 - Market -30%, Investor -15%
Using the argument above, they will say that the market "wins" because it leads the investor 2 out of 3 years. But let's look at the cumulative returns.
Market: 1.20 x 1.15 x 0.70 = 0.966
Investor: 1.15 x 1.12 x 0.85 = 1.0948
At the end of Year 3, the investor's return is higher even though he trailed the market 2 out of 3 years. The number of annual wins, even consecutive ones, means nothing.

2) They say that the market has to be efficient because any inefficiency would be quickly observed and arbitraged out due to so many players in the market. That is actually a circular argument, the same as saying the market is efficient because it is efficient.

But it is still wrong in other ways, because it assumes that life is so simple. Let me apply the same argument in the following analogy.
"There cannot be bad politicians, because the democracy process is fair and cannot elect a bad one. Furthermore, if a bad politician were somehow elected, he/she would not last long as we have a recall process to remove him/her from power. Conclusion: Our politicians have to be perfect."
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Old 06-20-2014, 05:16 PM   #27
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NW-Bound - With your point #1 I think you are getting really into the nitty gritty details of how to test for efficiency. For online forums, the arguments are necessarily simplified as one cannot be sure of the background of the reader.

The people who are paid to look at this stuff use a variety of models (some can be quite complex) and these definitely account for the second scenario. See slides 18-20 at

http://people.stern.nyu.edu/adamodar...efficiency.pdf

BTW I don't think the first method (looking at years with wins/losses) is necessarily bad. It corresponds to a non-parametric sign test which has the advantage that it makes no assumptions about the distributions of returns but the disadvantage is that it can lack power.
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Old 06-20-2014, 09:10 PM   #28
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I wonder how these studies measure investor's performance. Over what periods? I do not need any study to agree that no one, absolutely no one, can beat the S&P every year 10 or 20 years in a row. To do that would require you to leverage to the hilt to beat the market when it was boiling with dotcoms, then to get out at exactly the top to avoid getting creamed. One has to be stupid reckless and lucky at the same time.



A steady and long-term value investor will trail the market in some years, but win long-term like the fabled tortoise.







Sure. Most people would call it quit and stop pushing their luck if they could now retire on that gain.

Well full disclosure here, NW.... My $10k purchase is now worth $15k. Not quite enough profits to change my life unfortunately. But as bad as I have been in the past, buying one share of Intel at 20 and selling it at 30 would have still have made me feel like I was retiring at the top of my game.


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Old 06-21-2014, 04:34 PM   #29
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Warren Buffet seems to have done a pretty good job at it.
Here's another reason to stick to indexed funds.

In the early 1970's, when I was living in Lincoln, NE the local newspaper had a story about this investment guy up in Omaha who had doubled his company's value in just a few years.

I could have bought some BRK at the time, but I didn't know that this guy was any better than any other mutual fund manager who had a good short term run. I didn't buy.

So I've determined that, even if I believe there are investment managers who can consistently beat the market, I don't know how to identify them.
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Old 06-22-2014, 09:15 PM   #30
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The question though is not if whether to stick to index funds or managed funds. By their nature managed funds take a larger percentage of the pie. Index funds really do the average uneducated investor worse than a managed fund because with index funds the investor inevitably reads about 7 or 8 funds they should invest in and changes the timing between bond index total stock market REITs etc, all indexed to end up with about 1/2 of the market would actually give as described earlier in this thread. However this is understandable when people read they should be in 7 or 8 index funds. Many with a managed fund assume the guy knows more than them and stay invested in the managed fund, even though it's potential for the investor may be less than investing in index funds, if there is even a definition of what the optimal investment one would know to invest and plan on ahead of time.

It is only with a plan that one succeeds, whether that is managed funds, indexed funds or investing in stocks as an individual investor. For many I think it would be better if they bought the illusion the managed fund guy knew more than him. as for EFM I think it is what an index investor needs to stick to their plan.
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Old 06-22-2014, 09:25 PM   #31
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Many with a managed fund assume the guy knows more than them and stay invested in the managed fund...
I am not sure about this, holders of well-established value MFs excepted. Examples include holders of Wellesley/Wellington/Dodge & Cox and I am sure that there are other esteemed MFs.

In fact, in the late 90s there were so many managed funds that all invested in growth stocks, and people were flocking there because all they saw were the wonderful returns and did not understand the risks behind it. At that point, it was pointed out that there were more mutual funds than stocks traded on the exchange. More mutual funds than stocks!!!

Although I am not an indexing investor, I would think that an indexing investor would know not to chase the latest return and would stick with the market.

While I am not indexing, I do think that an indexing investor who buys-and-rebalances does better than a fad-chasing stock or MF investor. In the long run that is, as anybody can have a lucky streak.
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Old 06-22-2014, 09:57 PM   #32
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Morningstar actually has data on whether investors in aggregate do better or worse than the fund (due to performance chasing, market timing, etc). You can see it if you go to the performance tab (I think it only shows this for mutual funds not rtfs) and click on "investor returns".

For many vanguard funds, it looks like investors are generally capturing all of the return and not chasing performance. E.g. 10-year investor return for total stock market (vtsmx) is 9.01% for investors vs 8.26 for the fund.

However there are some funds where investor returns lag considerable. E.g., for vanguard energy 10-year investor returns is only 8.3% vs 13.4% total return. That's a whopping 5% lower return.
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Old 06-22-2014, 11:45 PM   #33
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Warren Buffet is an entrepreneur and an investor. He has the capability to change the board, the CEO, the strategy and culture of companies.

Using Buffet as an example of someone who can consistently pick winners is flawed in my opinion.

+1 He can dictate terms etc. to companies.... he can get deals that ordinary retail customers could not get... ever...
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Old 06-23-2014, 05:47 AM   #34
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+1 He can dictate terms etc. to companies.... he can get deals that ordinary retail customers could not get... ever...
In his early years he couldn't do that.

Now he is turning a disadvantage (size) into an advantage: custom deals and force changes.

Just an observation, nothing implied. Identifying or being early-buffet is just as hard. Especially since the typical value horizon is five years.
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Old 06-23-2014, 07:38 AM   #35
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Morningstar actually has data on whether investors in aggregate do better or worse than the fund (due to performance chasing, market timing, etc). You can see it if you go to the performance tab (I think it only shows this for mutual funds not rtfs) and click on "investor returns".

For many vanguard funds, it looks like investors are generally capturing all of the return and not chasing performance. E.g. 10-year investor return for total stock market (vtsmx) is 9.01% for investors vs 8.26 for the fund.

However there are some funds where investor returns lag considerable. E.g., for vanguard energy 10-year investor returns is only 8.3% vs 13.4% total return. That's a whopping 5% lower return.
I went to Morningstar site quite often, yet failed to notice that tab until you mentioned it. Thanks.

I wonder how that is computed. An MF knows the gain/loss when its investors sell out, but do all of them compile and report it?

And this begs a question. If so many investors trail the market which is an average, then does it not mean that many other investors beat it? For any who "buys high, sells low", there's his opposite who "buys low, sell high". And I would think those market-beaters can do it quite consistently.
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Old 06-23-2014, 07:50 AM   #36
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And this begs a question. If so many investors trail the market which is an average, then does it not mean that many other investors beat it? For any who "buys high, sells low", there's his opposite who "buys low, sell high". And I would think those market-beaters can do it quite consistently.
You are making the assumption the market beaters are consistently able to repeat their actions and that they are consistently the same investors - not the ones who were below average the previous year?
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Old 06-23-2014, 07:53 AM   #37
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I thought about that too. However, we read so much about people who burned out and never came back into the market. Their loss is permanently booked by others as gains. There's no statistics on this of course, hence it was a conjecture on my part.

And then, so many MFs reported their investors trailed the fund return for the last 10 years! As an ensemble, they trailed the market miserably. Who got their money? If you win some, then lose some next year, when averaged against your brother-in-law and neighbor, would you together not average out to match the market, minus friction losses?
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Old 06-23-2014, 08:00 AM   #38
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If you win some, then lose some next year, when averaged against your brother-in-law and neighbor, would you together not average out to match the market, minus friction losses?
Hey, I'm above average.
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Old 06-23-2014, 08:24 AM   #39
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Lucky coin tosser, you!
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Old 06-23-2014, 09:39 AM   #40
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Warren Buffet seems to have done a pretty good job at it.
I haven't specifically run the numbers but I've read his recent performace is far less than spectacular. His performance is heavily based on acquisitions made decades ago that look good from that perspective but not from 5 to 10 years ago. I can't remember when/where I saw this article. I'm certainly not going to fight this point but I wanted to bring it up.
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