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Old 02-15-2011, 03:10 AM   #61
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70% in index funds

30% in individual stocks

I enjoy keeping abreast of my fav individual stocks. I watch Jim Cramer every day and I use his advice for most of my short term trades. I have been very successful with this.

Currently, 77% of all of my retirement money is in the stock market.

The last 23 months in stocks have been nothing short of amazingly good.
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Old 02-15-2011, 08:40 AM   #62
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In fact, a frequent indexer's statement goes something like "I know I am not smart enough blah blah blah, cleverly implying that those who actively manage are both arrogant and deluded.

I have to admire this much word skill. Ha
Perhaps that is what others really mean, I can't say.

For me, I can accept that an individual might have enough ability and have the flexibility that the big guys don't have to be able to out-perform the market. But I also don't think that I can do it reliably enough to take the risk. And I also think it would be tough for someone to 'prove' they were doing better than the market, risk adjusted.

Even if I want to believe they can do it, it's a tough thing to prove. Was it luck, survivorship bias? Can you adjust the rewards for the risk? It would take a lot of scrutiny of the records to cipher this.

And why would that person care to 'prove' it to me? They get nothing of it, they're probably far more interested in just making money than proving anything to anybody.


After getting that out in words, I think I'm really in the camp that wants to believe. It just seems like some work, discipline and intellect ought to provide rewards. Yet, I can't help but think that all those eyes and computers on the market are already trading the opportunities, making it very difficult to eek out much at all. But what do I know? Might still be some niches in there?

So congrats to anyone able to outperform. And if anyone wants to share the methods it would be interesting, but I also understand if they don't care to bother.

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Old 02-15-2011, 08:45 AM   #63
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Old 02-15-2011, 10:11 AM   #64
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Perhaps that is what others really mean, I can't say.

For me, I can accept that an individual might have enough ability and have the flexibility that the big guys don't have to be able to out-perform the market.
I'm opening to believing that too, but I just haven't seen any statistical evidence supporting this and a lot of evidence against it. For example, see Fama & French's paper on luck versus skill. They also look at funds as small as $5M in assets so that's definitely covering the small guys with flexibility.

Luck versus Skill in Mutual Fund Performance - Fama/French Forum

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SSRN-Luck Versus Skill in the Cross Section of Mutual Fund Returns by Eugene Fama, Kenneth French
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Old 02-15-2011, 10:52 AM   #65
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I'm opening to believing that too, but I just haven't seen any statistical evidence supporting this and a lot of evidence against it. For example, see Fama & French's paper on luck versus skill. They also look at funds as small as $5M in assets so that's definitely covering the small guys with flexibility.

Luck versus Skill in Mutual Fund Performance - Fama/French Forum
But the conclusion of this paper is that some active fund managers do outperform the market, though not by enough to make up increased expenses.
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Old 02-15-2011, 01:40 PM   #66
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But the conclusion of this paper is that some active fund managers do outperform the market, though not by enough to make up increased expenses.
I'd phrase it a bit differently: There is not enough statistical evidence to suggest that there is a "stock picking skill" whereby someone can produce long-term and sustainable outperformance -- *especially* after fees are taken out.

Let's look at a 10 year period. Ignoring the "break even with the market" condition (like a coin landing on its edge), let's look at a heads/tails coin toss -- heads, the manager beats the appropriate benchmark; tails and s/he underperforms it.

Just by random luck, you'd expect to one out of every 1,024 people who flips a coin 10 times to get "heads" all 10 times. So by dumb luck there will be one guy out of 1,024 who would beat their benchmark in all 10 years. Yet in any 10 year period, you're not likely to see enough managers beat their benchmark in all 10 years to be more than one in 1,024. And that doesn't even account for survivor bias and fees!

Hence, from a statistical point of view, it's hard to conclude that outperformance is nothing more than luck. MIGHT it be skill? Sure, but the statistics don't point to a statistically significant universe of fund managers who consistently beat their benchmark any more than a random coin toss would. Note here that "lack of statistical evidence" for skill isn't the same as disproving it.
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Old 02-15-2011, 01:42 PM   #67
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I'd phrase it a bit differently: There is not enough statistical evidence to suggest that there is a "stock picking skill" whereby someone can produce long-term and sustainable outperformance -- *especially* after fees are taken out.

Let's look at a 10 year period. Ignoring the "break even with the market" condition (like a coin landing on its edge), let's look at a heads/tails coin toss -- heads, the manager beats the appropriate benchmark; tails and s/he underperforms it.

Just by random luck, you'd expect to one out of every 1,024 people who flips a coin 10 times to get "heads" all 10 times. So by dumb luck there will be one guy out of 1,024 who would beat their benchmark in all 10 years. Yet in any 10 year period, you're not likely to see enough managers beat their benchmark in all 10 years to be more than one in 1,024. And that doesn't even account for survivor bias and fees!

Hence, from a statistical point of view, it's hard to conclude that outperformance is nothing more than luck. MIGHT it be skill? Sure, but the statistics don't point to a statistically significant universe of fund managers who consistently beat their benchmark any more than a random coin toss would. Note here that "lack of statistical evidence" for skill isn't the same as disproving it.
TIME IN the market is much more likely to give you the results you seek than TIMING the market..........
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Old 02-15-2011, 04:15 PM   #68
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I'd phrase it a bit differently: There is not enough statistical evidence to suggest that there is a "stock picking skill" whereby someone can produce long-term and sustainable outperformance -- *especially* after fees are taken out.
So you're disagreeing with the authors? They say:
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The new results say that a small fraction of managers do have sufficient skill to cover costs.
I don't have an opinion, myself --- I'm just trying to get clear about the positions on this issue.
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Old 02-15-2011, 04:38 PM   #69
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100% mutual funds. Currently working too many hours daily to manage/pay attention to individual stocks, although I would like to eventually. About 40% are index funds, and the rest are actively managed. The actively managed ones seem to perform better overall, even after accounting for higher expense ratios.
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Old 02-15-2011, 04:41 PM   #70
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I have about 7-8% each in Intel and Berkshire. 25% in ETFs, and 40% in 30+ individual stocks and the remaining 20% in cash, bond funds and CDs. Most of my individual issues are actually Master Limited Partnerships. I plan on increasing my ETF percentage by 5% when/if the market corrects.

MLP have very high yields and up until the last year, were IMO undervalued. They are very difficult for mutual funds to purchase for tax reasons, and to me one of the prime reasons for having individual stocks, since none of the major index fund include them.
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Old 02-15-2011, 05:34 PM   #71
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I'm opening to believing that too, but I just haven't seen any statistical evidence supporting this and a lot of evidence against it. For example, see Fama & French's paper on luck versus skill. They also look at funds as small as $5M in assets so that's definitely covering the small guys with flexibility.

Luck versus Skill in Mutual Fund Performance - Fama/French Forum

or

SSRN-Luck Versus Skill in the Cross Section of Mutual Fund Returns by Eugene Fama, Kenneth French

The problem with every academic study on this subject is they study the wrong thing, the performance of mutual funds and not the individual performance of their managers.

I've used this analogy before but I think it is worth considering.
Pro players are like stocks it is relatively easy to find out which one perform better/higher profit. Just as stock price are projection of future profits, player salaries are a reflection of their future potential. General managers/coaches are the equivalent of fund managers. They select which players are the best values (this is especially true for sports which have strong salary caps). I am ignoring the value that coaches add in enhancing player performance and play calling, just focus on their personal decisions.

If academics studied professional sports they would find that there are only three franchise, Lakers, Celtics, and Yankees that have long term winning percentage above chance. The NFL is particularly remarkable in that the highest winning percentage is around 55%, last I looked. Clearly on average sports franchise have a .500 record.

They would conclude that sports owners could save money, rather than hiring a general manager/coach to make personal decision they should use the consensus of scouting reports for drafting. In fact it is really pointless to make trades because all of the information about a player current and future potential is known by every participant, and is accurately reflected in their salary. By looking at the long term records of the sports and finding that only 3 superior performance, academics could logically conclude that general managers do nothing but increase the expense of the owners.

Needless to say if such a academic paper was ever published it would be met with howls of derision by the tens of millions of sport fans, who could rattle of dozens of coaches and GMs with fantastic long-term records and clear examples of their smart personal choices. Just as importantly they could come up with scores of GMs/coaches who made really stupid trades.

The problem is that measuring the long term of individual portfolio manager is very difficult so nobody does it. We know the names of handful of folks, Buffett, Lynch, Gross, Graham with fantastic records. What is completely unknown is their a second tier of money manager (say 5 to 10%) and individual investors with much above long term records. Nobody knows.

Now obviously figuring out who these great stock pickers are early enough to invest with them is very difficult and quite possibly a fools errant.
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Old 02-15-2011, 05:42 PM   #72
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100% index split between stock and bond funds. Also have ESPP and RSUs but they are sold immediately upon purchase/vesting and put into index funds.

This stance is radically different from less than a year ago when Ameriprise had us in every conceivable wrong vehicle. Ameriprise is now gone and I manage our portfolio...very happy with what a coherent AA and indexing has done for our returns in the last six months.
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Old 02-15-2011, 05:49 PM   #73
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The problem with every academic study on this subject is they study the wrong thing, the performance of mutual funds and not the individual performance of their managers.

I've used this analogy before but I think it is worth considering.
Pro players are like stocks it is relatively easy to find out which one perform better/higher profit. Just as stock price are projection of future profits, player salaries are a reflection of their future potential. General managers/coaches are the equivalent of fund managers. They select which players are the best values (this is especially true for sports which have strong salary caps). I am ignoring the value that coaches add in enhancing player performance and play calling, just focus on their personal decisions.

If academics studied professional sports they would find that there are only three franchise, Lakers, Celtics, and Yankees that have long term winning percentage above chance. The NFL is particularly remarkable in that the highest winning percentage is around 55%, last I looked. Clearly on average sports franchise have a .500 record.

They would conclude that sports owners could save money, rather than hiring a general manager/coach to make personal decision they should use the consensus of scouting reports for drafting. In fact it is really pointless to make trades because all of the information about a player current and future potential is known by every participant, and is accurately reflected in their salary. By looking at the long term records of the sports and finding that only 3 superior performance, academics could logically conclude that general managers do nothing but increase the expense of the owners.

Needless to say if such a academic paper was ever published it would be met with howls of derision by the tens of millions of sport fans, who could rattle of dozens of coaches and GMs with fantastic long-term records and clear examples of their smart personal choices. Just as importantly they could come up with scores of GMs/coaches who made really stupid trades.

The problem is that measuring the long term of individual portfolio manager is very difficult so nobody does it. We know the names of handful of folks, Buffett, Lynch, Gross, Graham with fantastic records. What is completely unknown is their a second tier of money manager (say 5 to 10%) and individual investors with much above long term records. Nobody knows.

Now obviously figuring out who these great stock pickers are early enough to invest with them is very difficult and quite possibly a fools errant.
Nice post.

I am not sure if there is a way to measure whether an investor can outperform the market. That is much different that believing that it can't occur. I know that quarterbacks on average have a 50% winning percentage. If given a choice I am going to take a Tom Brady or a Peyton Manning even if I can't quantitatively prove they are better than Travaris Jackson. It could be just luck.

In other areas of life we are often forced to believe things we can't quantitatively prove. I'll take my luck with Brady of Manning in the same way I have no doubt that investors can outperform the market.
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Old 02-15-2011, 06:59 PM   #74
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Nice post.

I am not sure if there is a way to measure whether an investor can outperform the market. That is much different that believing that it can't occur. I know that quarterbacks on average have a 50% winning percentage. If given a choice I am going to take a Tom Brady or a Peyton Manning even if I can't quantitatively prove they are better than Travaris Jackson. It could be just luck.

In other areas of life we are often forced to believe things we can't quantitatively prove. I'll take my luck with Brady of Manning in the same way I have no doubt that investors can outperform the market.
Travis Jackson is a what 3rd stringer for the Vikings (I never had heard of him). A quick google shows that his salary is 550K vs 14 million for Mannings. Clearly Manning is a better QB and few would argue with that, maybe Jackson's mom . The question is who is the better value. Could the Colts take the 13 million savings by downgrading to Jackson, and spend that on getting a top running back 3-4 million, a top lineman $2 million, and spend the rest of defense. I have no clue but I am confident that plenty of folks do and the really really good ones probably work in the NFL as GMs or coaches. I also imagine that there are probably some amateur fantasy football guys who do very well also.

Apple and Acer are both computer/consumer electronics companies that start with A. Acer has revenues of $20 billion profits of $.5 billion and market cap of $7 billion. Apple has revenue of $70 billion profits of $14 billion and a market cap of $330 billion. Clearly Apple is a better company than Acer the question is it a better value. If we accept that great coaches/GM are better at evaluating talent, why is hard to believe that great money managers better at evaluating stocks?
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Old 02-15-2011, 08:53 PM   #75
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But the conclusion of this paper is that some active fund managers do outperform the market, though not by enough to make up increased expenses.
Yes I think the paper does imply that there might be a very small number of managers that are outperforming the market by skill. But the vast majority are adding negative value. So what are the odds that you can pick the winners? almost nil:

"Unfortunately, these good funds are indistinguishable from the lucky bad funds that land in the top percentiles of the t(α) estimates but have negative true α. As a result, if we buy a portfolio of the top three percentiles of t(α) estimates, the expected three-factor net return α is zero; the positive true α of the lucky (but hidden) good funds is offset by the negative true α of the lucky bad funds."
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Old 02-16-2011, 07:50 AM   #76
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The problem with every academic study on this subject is they study the wrong thing, the performance of mutual funds and not the individual performance of their managers.
What's the difference between the performance of a mutual fund and the performance of the manager? Are you suggesting that academics are so stupid that in 40 years of research they've never controlled for things like manager migration? Just about anything you can imagine, has been studied. Noble Prizes are there for the taking if you want to put a study together that will overthrow Fama's work.

This conversation reminds me of the "God of the gaps" argument with active traders looking to ever shrinking ground to stand on as evidence mounts around them that what they claim to be able to do can't be verified by any known science.
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Old 02-16-2011, 08:25 AM   #77
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Noble Prizes are there for the taking...
If anyone is interested, here's a video of last year's award ceremony...

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Old 02-16-2011, 08:59 AM   #78
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Don't take the sports metaphor too far. A quarterback's performance yesterday is indicative of his performance today. A stock's past performance is not indicative of future performance.
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Old 02-16-2011, 09:05 AM   #79
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What's the difference between the performance of a mutual fund and the performance of the manager? Are you suggesting that academics are so stupid that in 40 years of research they've never controlled for things like manager migration? Just about anything you can imagine, has been studied. Noble Prizes are there for the taking if you want to put a study together that will overthrow Fama's work.

This conversation reminds me of the "God of the gaps" argument with active traders looking to ever shrinking ground to stand on as evidence mounts around them that what they claim to be able to do can't be verified by any known science.
Does Warren Buffet add alpha?
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Old 02-16-2011, 09:18 AM   #80
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Does Warren Buffet add alpha?
Anecdotes are meaningless.
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