Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Old 04-10-2015, 08:50 PM   #61
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
NW-Bound's Avatar
 
Join Date: Jul 2008
Posts: 19,403
Quote:
Originally Posted by gcgang View Post
By definition, index investing does the average less the index expense. But doing slightly less than average, a C-, looks pretty good when most everyone else is flunking.
If indexers get the average, and if it is true that most active investors get less than average returns, then somebody is getting the above average returns in order to balance out.

I brought up this puzzle before, but do not remember if anyone ventured a plausible answer.
__________________

__________________
"Old age is the most unexpected of all things that can happen to a man" -- Leon Trotsky
NW-Bound 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 04-10-2015, 09:22 PM   #62
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 13,271
Quote:
Originally Posted by gcgang View Post
By definition, index investing does the average less the index expense. But doing slightly less than average, a C-, looks pretty good when most everyone else is flunking.


Sent from my iPad using Early Retirement Forum

No, you are looking at the return... not the relative position of an investor...

Take 10 investors.... say the indexer matches the avg of the index... but all active investors do not come close... that means the indexer is the 'best' investor of the bunch.... he is not 'average' at all...

Now say the indexer matches the avg of the index.... but all active investors beat the index... now our indexer is the worst investor of the bunch... again, not 'average'.....


History shows that the indexer will beat active investing about 90% of the time... I think getting a 90 means an "A", not a "C"....
__________________

__________________
Texas Proud is offline   Reply With Quote
Old 04-11-2015, 12:14 AM   #63
Full time employment: Posting here.
CaliforniaMan's Avatar
 
Join Date: Dec 2013
Location: San Diego
Posts: 846
Quote:
Originally Posted by Texas Proud View Post
No, you are looking at the return... not the relative position of an investor...

Take 10 investors.... say the indexer matches the avg of the index... but all active investors do not come close... that means the indexer is the 'best' investor of the bunch.... he is not 'average' at all...

Now say the indexer matches the avg of the index.... but all active investors beat the index... now our indexer is the worst investor of the bunch... again, not 'average'.....


History shows that the indexer will beat active investing about 90% of the time... I think getting a 90 means an "A", not a "C"....
+1

Sent from my SGH-T999 using Early Retirement Forum mobile app
__________________
Merrily, merrily, merrily, merrily,
Life is but a dream.
CaliforniaMan is offline   Reply With Quote
Old 04-11-2015, 12:44 AM   #64
Full time employment: Posting here.
urn2bfree's Avatar
 
Join Date: Feb 2011
Posts: 711
Quote:
Originally Posted by NW-Bound View Post
If indexers get the average, and if it is true that most active investors get less than average returns, then somebody is getting the above average returns in order to balance out.

I brought up this puzzle before, but do not remember if anyone ventured a plausible answer.
Some active investors just by chance will get above average some years. The knock on active is not than none of them ever do better than average. The knocks are:

1)MOST do worse than average or average at best and cost more doing it
2)None (practically) can consistently do better than average. A recent study showed 0.28% of funds remaining within the top 25% over the last 5 year period... http://www.spindices.com/documents/s...-june-2014.pdf
3)It is impossible to guess year to year which ones will do better- so given #1(above), the odds are you will pick wrong more often than right

Hence the smart money bets on Indexing...



Sent from my iPad using Early Retirement Forum
__________________
urn2bfree is offline   Reply With Quote
Old 04-11-2015, 04:12 AM   #65
Full time employment: Posting here.
gcgang's Avatar
 
Join Date: Sep 2012
Posts: 925
Quote:
Originally Posted by NW-Bound View Post
If indexers get the average, and if it is true that most active investors get less than average returns, then somebody is getting the above average returns in order to balance out.

I brought up this puzzle before, but do not remember if anyone ventured a plausible answer.

Its me. Me, Warren Buffett, Ray Dalio and the folks at American Funds that are getting all the above average returns.


Sent from my iPad using Early Retirement Forum
__________________
In theory, there's no difference between theory and practice. In practice, there is. YB
gcgang is offline   Reply With Quote
Old 04-11-2015, 05:58 AM   #66
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,408
Quote:
Originally Posted by urn2bfree View Post
Some active investors just by chance will get above average some years. The knock on active is not than none of them ever do better than average. The knocks are:

1)MOST do worse than average or average at best and cost more doing it
2)None (practically) can consistently do better than average. A recent study showed 0.28% of funds remaining within the top 25% over the last 5 year period... http://www.spindices.com/documents/s...-june-2014.pdf
3)It is impossible to guess year to year which ones will do better- so given #1(above), the odds are you will pick wrong more often than right

Hence the smart money bets on Indexing...



Sent from my iPad using Early Retirement Forum
but as i say while most funds do not beat the indexes most active funds investors based on where they have their money do .

there are thousands of tiny funds that are at the top one year and the bottom the next and we rarely can even name them .

but if you look at the bulk of the funds where active investors have their money the results are very different.

funds like fidelity growth company , contra , low priced stock fund to name a few have tens of billions alone.

i think you will find that the old 80/20 rule may apply and 80% of investor money is centered in 20% of those middle of the pack good performers that usually beat the indexes over long periods of time even with their slightly higher fees.

i know my fidelity insight growth model is ahead by over 450k compared to had i bought a total market fund.


that is based on a 100k investment in 1987 when i started. they just use that middle of the pack group of plain old fidelity funds. rarely at the top but they just deliver good performance for the money.
__________________
mathjak107 is offline   Reply With Quote
Old 04-11-2015, 06:13 AM   #67
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,424
Quote:
Originally Posted by Running_Man View Post
Warren Buffet just bought a private placement partial stake into a company Axalta that is primarily owned by Carlyle Group, the group that coined the phrase. He has also partnered with 3G Capital, a private equity group, in buying shares in Heinz/Kraft Foods and the Tim Horton/Burger King deals. These are both companies of the type he has actually criticized as vultures looking for an exit strategy as soon as they purchase.

Most interestingly on the bet, which was actually only 320 thousand, which was the S&P500 would beat the Hedge Fund managers was each side would put the 320 thousand into a zero coupon bond that would then come to the million dollars at the end of ten years. The conservative "sure" zero coupon bond....
Quote:
Originally Posted by Totoro View Post
As far as I know 3G Capital doesn't divest. Probably why Buffet teamed up with them. They are still majority owner in Heinz, Kraft, Tim Horton, Burger King and AB/Inbev. So the vulture label doesn't apply. And from my own network I can tell these guys don't raid & dump. They do go in and shake things up seriously, like firing half or more of the senior management. They basically re-invented zero based budgeting as well. Buffet supplies capital, not management. 3G provides that.

Don't know the Axalta story, what I gather from the press release is that Buffet bought the shares from Carlyle shortly after an IPO. So it's not a partnership as with 3G, just a transaction where it's easier to buy directly vs. open market. He might disapprove of Carlyle (don't know), doesn't preclude dealing with them on favorable terms.....
+1 with Totoro

I'm not familiar with 3G Capital but we did consulting work with many private equity funds (including Carlyle) while I was working and none of the ones we worked with were "looking for an exit strategy as soon as they purchase". They generally look to hold at least 5-10 years and do exactly what Totoro described but if things turnaround faster and they can extract value sooner they will sell earlier.

Berkshire does do a lot of private placement financing where they can get good terms, just as Totoro describes.

I don't get Running Man's $320k zero... if $320k grows to $1 million over 10 years that is a 12.1% annual rate of return.... let me know where I can buy that zero and I'll jump all over it.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is offline   Reply With Quote
Old 04-11-2015, 09:45 AM   #68
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
NW-Bound's Avatar
 
Join Date: Jul 2008
Posts: 19,403
If as a whole group, and over a long time, active investors get less than the market, then somebody else has their money. Indexers do not trade, so indexers do not get this money. Somebody else does.

Imagine a poker game. If you are not in the game, then you cannot win nor lose. So, we can leave the indexers out of the rest of this talk.

If you are in the game, an individual could either lose or win, but the pool of money is redistributed among this group of players. As a closed group, their wealth is constant. An individual can win one week, then lose even bigger the next. Still, the wealth among players remains constant, and is only shifted around.

If in this game, we observe that a player does poorly over time, then I have to conclude that another player must do well over time. That's what I meant earlier when I say that if somebody is below average, then someone else must be above.

So, back to the stats that we see all the time, which say active MFs as a group do not do well. Who has got their money? Correct me if I am wrong, but I think they only counted public mutual funds. I was thinking about the "other" active investors.

Namely, what about individual stock owners, hedge funds, pension funds, endownment funds, investment banks, sovereign funds, etc...? There are more active investors than just MFs. The above possible unseen players were whom I asked about in the earlier post, some of whom must have a better than 50% chance to buy low/sell high. Has their performance been compiled? Somebody'd better count up all the beans to see who's been collecting them. I am curious to know.

So, if it is true that most active investors trail the index, then a few smart ones among them get that money from the losers.

By the way, among public mutual funds, we cannot look at their price and say that its investors are winning or losing that much. Suppose fund A drops in price from $10/share down to $9/share. We cannot conclude that its investors have lost 10%. If we look at its assets, we may see that its assets drop more than 10%. That would mean that its investors have been bailing out along the way, and are not in for the full ride, hence lose less than 10% in the aggregate. Conversely, if fund A doubles in price, not all its investors get 100% richer, as some might just chase performance and just bought in yesterday.

PS. I see the post by gcgang that mentions some of the other "active investors". And mathjack also shows how looking at MF prices alone is not enough. One needs to look at the volume of the money flow. The conclusion is not as clear cut and simple as many studies and reports show.
__________________
"Old age is the most unexpected of all things that can happen to a man" -- Leon Trotsky
NW-Bound is offline   Reply With Quote
Old 04-11-2015, 09:58 AM   #69
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,408
any time a simple answer is given to complex issues that answer is usually wrong or flawed.
__________________
mathjak107 is offline   Reply With Quote
Old 04-11-2015, 09:58 AM   #70
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,278
Quote:
Originally Posted by NW-Bound View Post
...
If in this game, we observe that a player does poorly over time, then I have to conclude that another player must do well over time. That's what I meant earlier when I say that if somebody is below average, then someone else must be above.

So, back to the stats that we see all the time, which say active MFs as a group do not do well. Who has got their money? ....
I think Texas Proud answered this earlier - I'll try re-stating what he said:

Isn't it possible that the 'poor players' raise what you are calling the 'average' of the 'indexers'?

Imagine this scenario - a group of 100 people play games of chance for one night, and all put in the same amount and all split the 'house' gain/loss at the end of the night. Ninety-nine of them play 'fair' games, they all break even exactly, and the house has no gain/loss from these 99.

But one player chooses a high risk/high reward game that on average, has a statistical loss for the player. He loses that night, and the house gain gets split evenly among all 100 players. So 99 did above average, 1 did below. I think the problem with your description is that you are referring to the 99 as 'average', they are just common, but their 'average' is above average.

In a stock market, this means a poor active investor who buys high and sells low ends up selling to that larger group, and raising their average slightly.

That works, right? And I agree with others, it would not take very many active buyer/sellers to move the price of stocks held in the index. After all, only a portion of the outstanding shares are typically traded on any single day, yet the price of all those shares changes.

-ERD50
__________________
ERD50 is offline   Reply With Quote
Old 04-11-2015, 10:09 AM   #71
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
NW-Bound's Avatar
 
Join Date: Jul 2008
Posts: 19,403
By average, I mean average return. I do not mean the position in ranking, which is of course in debate.

I think we all agree that average return is the market return. No matter how many indexers are out there, if someone makes less than the market, than someone else makes more than the market. In the above post, I suggest we leave the indexers out of this.

In fact, if nobody indexes, and everybody trades, my argument still holds. If somebody keeps losing in a poker game, then someone keeps winning.

So, what I said is not in conflict with what Texas Proud wrote at all.
__________________
"Old age is the most unexpected of all things that can happen to a man" -- Leon Trotsky
NW-Bound is offline   Reply With Quote
Old 04-11-2015, 10:13 AM   #72
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
NW-Bound's Avatar
 
Join Date: Jul 2008
Posts: 19,403
It is very likely to be true that among all investors, indexers' ranking is better than 50%.

But that's the universe of all investors, and that includes a lot of small investors who clamored after dot-com stocks, lost money, and were not seen again for many years until the next bull market comes along.

PS. I just finished reading Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America. It describes how some illicit players even siphon off money from the market, and that lowers the average return for everybody. However, that's outside of the thread topic, as their activities involved more than pure trading.
__________________
"Old age is the most unexpected of all things that can happen to a man" -- Leon Trotsky
NW-Bound is offline   Reply With Quote
Old 04-11-2015, 10:30 AM   #73
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,278
Quote:
Originally Posted by NW-Bound View Post
By average, I mean average return. I do not mean the position in ranking, which is of course in debate.

I think we all agree that average return is the market return. No matter how many indexers are out there, if someone makes less than the market, than someone else makes more than the market. In the above post, I suggest we leave the indexers out of this.

In fact, if nobody indexes, and everybody trades, my argument still holds. If somebody keeps losing in a poker game, then someone keeps winning.

So, what I said is not in conflict with what Texas Proud wrote at all.
Yes, we don't know who is getting the excess that the 'losers' give up. It could be the indexers, it could be the active winners?

So that has me thinking, we often see that the majority of active funds trail the index, but what is their average? Maybe a few of the active winners win by a large amount, and the average could be positive (or slight either way)?

-ERD50
__________________
ERD50 is offline   Reply With Quote
Old 04-11-2015, 10:43 AM   #74
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
NW-Bound's Avatar
 
Join Date: Jul 2008
Posts: 19,403
Quote:
Originally Posted by ERD50 View Post
Yes, we don't know who is getting the excess that the 'losers' give up. It could be the indexers, it could be the active winners?

So that has me thinking, we often see that the majority of active funds trail the index, but what is their average? Maybe a few of the active winners win by a large amount, and the average could be positive (or slight either way)?

-ERD50
Indexers' return is the benchmark, and we use the market return as the benchmark. So, indexers cannot get the excess that losers give up. Indexers do not trade, remember?

I think it is really the "smart money", the better organized institutional investors, some of whom I listed above, who got the bulk of the money from loser individual investors.

PS. I remember that indexers who rebalance also get some excess return over somebody who just holds. But of course that's true only during market gyrations. In a long steady bull market climb like 1980-2000, buy-holders win big over rebalancers. It's not that simple, eh?
__________________
"Old age is the most unexpected of all things that can happen to a man" -- Leon Trotsky
NW-Bound is offline   Reply With Quote
Old 04-11-2015, 11:31 AM   #75
Thinks s/he gets paid by the post
 
Join Date: Mar 2010
Location: Kerrville,Tx
Posts: 2,712
Quote:
Originally Posted by ERD50 View Post
Yes, we don't know who is getting the excess that the 'losers' give up. It could be the indexers, it could be the active winners?

So that has me thinking, we often see that the majority of active funds trail the index, but what is their average? Maybe a few of the active winners win by a large amount, and the average could be positive (or slight either way)?

-ERD50
Perhaps here the analogy to a casino is apt it is the House that gets the excess returns i.e. the managers of the funds.
__________________
meierlde is offline   Reply With Quote
Old 04-11-2015, 02:26 PM   #76
Thinks s/he gets paid by the post
photoguy's Avatar
 
Join Date: Jun 2010
Posts: 2,301
Quote:
Originally Posted by meierlde View Post
Perhaps here the analogy to a casino is apt it is the House that gets the excess returns i.e. the managers of the funds.
I remember reading a paper by Fama (?) that showed any excess alpha of mutual funds going to the fund manager in increased expense ratio.
__________________
photoguy is offline   Reply With Quote
Old 04-11-2015, 05:01 PM   #77
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 13,271
Quote:
Originally Posted by NW-Bound View Post
Indexers' return is the benchmark, and we use the market return as the benchmark. So, indexers cannot get the excess that losers give up. Indexers do not trade, remember?

I think it is really the "smart money", the better organized institutional investors, some of whom I listed above, who got the bulk of the money from loser individual investors.

PS. I remember that indexers who rebalance also get some excess return over somebody who just holds. But of course that's true only during market gyrations. In a long steady bull market climb like 1980-2000, buy-holders win big over rebalancers. It's not that simple, eh?

You keep forgetting the big vig that the investment industry takes out of the game each and every day....

Also, the indexes are just that... an index... if the DOW goes up 10% it does not mean that wealth went up 10%.... the DOW is a dollar weighted index and if a cheap stock like CSCO goes up, it does not have as much impact on the index as McDonalds.... but McD has less market cap than CSCO.... not the same with other indexes.... but they probably have some issue also....


Last.... IIRC, the question arose about indexing vs other mutual funds... so that is what I was answering....
__________________
Texas Proud is offline   Reply With Quote
Old 04-11-2015, 05:22 PM   #78
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
NW-Bound's Avatar
 
Join Date: Jul 2008
Posts: 19,403
No, I do not forget the friction loss that MF managers or the trading houses take.

However, I am under the impression that active investors MFs trail the index a lot more than the 1 or 2 percent that is the expense ratio. If so, how is the missing amount accounted for?

The S&P 500 is market-cap weighted, and does reflect very closely the percentage movement of the entire equity wealth. It is still missing the smaller cap stocks, but I remember reading that these are not significant compared to the giants.

PS. I had to change the word "active investors" to "active MFs" as they should not be used synonymously.
__________________
"Old age is the most unexpected of all things that can happen to a man" -- Leon Trotsky
NW-Bound is offline   Reply With Quote
Old 04-11-2015, 06:22 PM   #79
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,278
Quote:
Originally Posted by NW-Bound View Post
...
However, I am under the impression that active investors trail the index a lot more than the 1 or 2 percent that is the expense ratio. If so, how is the missing amount accounted for? ...
Isn't the explanation that Texas Proud and I gave a possible answer? The X% is already in the indexes?

So if an active investor buys high and sells low, every fund/pension following the index is buying as part of investing deposits and payroll deductions as part of normal business.

I wonder how the actual algorithms work in an S&P 500 index fund. Do they really own all 500? I would think yes, if they are big they don't want their buys/sells to flood the market - concentrating in a sample would cause that to happen to an extent. When do they re-balance? Is there a forum for index fund managers where they endlessly debate re-balancing strategies?

But if a stock drops, and all the index funds need to sell it, doesn't that cause it to drop further, causing them to have to sell more? Sounds like a run-away freight train (or thermal runaway). So maybe they only rebalance occasionally, and all out of sync from one another? Sounds like it is the indexes that might be buying high and selling low?

At any rate, few active funds surpass the index, so for now it is academic.

-ERD50
__________________
ERD50 is offline   Reply With Quote
Old 04-11-2015, 06:45 PM   #80
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
NW-Bound's Avatar
 
Join Date: Jul 2008
Posts: 19,403
First, please note the correction I made in the post that you reply to. That is, I strongly believe one cannot use the performance of active MFs to judge all active investors.

In an earlier post, I name several classes of active investors that are not active MFs: individual stock owners, hedge funds, pension funds, endownment funds, investment banks, sovereign funds, etc... How do they do? If they do well, where's that money coming from?

Quote:
Originally Posted by ERD50 View Post
Isn't the explanation that Texas Proud and I gave a possible answer? The X% is already in the indexes?
But, let me rephrase your statement to see if I understand it. You were saying that the active MFs who are losers somehow boost up the return of the market, enriching the indexers or even buy-holders even if the latter do not trade.

There have been many actions of the financial industry that have caused harm, meaning taking away from the market. It is easily seen how the market could be higher if there were no financial fiasco caused by CDO, CDS, and all that crap, resulting in huge amounts of government money to bail them out (and much went into their pockets as salaries and bonuses). These deleterious effects take away from the market, actually the whole economy, and hurt everybody, whether you trade actively or not. They cause the index to go down.

Now, I am trying to see how active traders or stock pickers do the reverse to the market, boosting it up so that even buy-holders can benefit. I cannot see how though. I can see how they enrich the MF managers and the stock exchanges, but not the non-traders.

So, how about the other "active investors" I described, the one who are not "loser active MFs"?
__________________

__________________
"Old age is the most unexpected of all things that can happen to a man" -- Leon Trotsky
NW-Bound 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
Index funds and Index ETF offroad Stock Picking and Market Strategy 19 06-18-2015 12:46 PM
What happens if the unthinkable happens? newporttony FIRE and Money 79 03-09-2009 09:31 AM
Index funds beat most active funds JustCurious FIRE and Money 57 10-23-2006 12:14 PM
Index Funds or Balanced Funds ? renferme FIRE and Money 5 04-20-2004 05:21 PM

 

 
All times are GMT -6. The time now is 02:55 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.