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Passive vs active: SCHA vs MDS
Old 12-25-2013, 02:47 PM   #1
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Passive vs active: SCHA vs MDS

It's almost impossible to beat the market. The Magic Diligence strategy is an excellent attempt. It uses "Magic Formula" stocks and tries to pick the best of them.

Again. An intelligent strategy, lots of hard work and stress has not been able to beat its "market" over the last six years.

SCHA: CAGR = 10.98%. GSD = 24.31%.

MDS: CAGR = 9.68%. GSD = 23.75%.
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AA = 60/35/5. Expected CAGR = 5.7%. GSD (5y) = 7.8%. USD inflation (10 y) = 1.8%. AWR = 3.0%. TER = 0.5%. Net Port Yield = 1.7%. Term = 36 yr. FI Duration = 4.9 yr. Portfolio survival probability = 86%.
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Old 12-25-2013, 02:51 PM   #2
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Isn't any investing strategy with the word "magic" in it discredited by default anyway?
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Old 12-25-2013, 03:00 PM   #3
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IMO and extended experience, if a stock picking strategy doesn't use "Magic Formula"- like stocks (high earning cheap small companies) it is disqualified by default.

Even picking "magic stocks" with diligence cannot beat it's passive index represented by SCHA or VB.
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AA = 60/35/5. Expected CAGR = 5.7%. GSD (5y) = 7.8%. USD inflation (10 y) = 1.8%. AWR = 3.0%. TER = 0.5%. Net Port Yield = 1.7%. Term = 36 yr. FI Duration = 4.9 yr. Portfolio survival probability = 86%.
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Old 12-25-2013, 03:09 PM   #4
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I never heard of MDS. Looked up on the Web and found the following: myelodysplastic syndromes (MDS, formerly known as preleukemia).

That can't be right. Let's try again, but with Magic and diligence added as key words. Ah, something about an investment newsletter. Oh well, I won't go further.
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Old 12-25-2013, 03:29 PM   #5
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Magic Formula Investing Stock Picks - MagicDiligence
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AA = 60/35/5. Expected CAGR = 5.7%. GSD (5y) = 7.8%. USD inflation (10 y) = 1.8%. AWR = 3.0%. TER = 0.5%. Net Port Yield = 1.7%. Term = 36 yr. FI Duration = 4.9 yr. Portfolio survival probability = 86%.
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Old 12-25-2013, 03:32 PM   #6
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Unless one is a professor, what is the payoff in trying to prove that one cannot beat the market?

Ha
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Old 12-25-2013, 03:33 PM   #7
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That's the Web site I found, but did not enter.

About beating the market, it is indeed difficult. Looking back, the time it was easiest to make money was after a bubble has burst, and blood was flowing on the streets. Having been through 2 big ones in the last 10 years, I did better with the latest one than the first.

Should I hope for another crash?
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Old 12-25-2013, 03:42 PM   #8
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Quote:
Originally Posted by galeno View Post
It's almost impossible to beat the market.
I think you need to be more precise about what you mean by "impossible", "beat", and "market". There are hundreds/thousands of funds that do better than the market (i'm also being loose with terminology).
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Old 12-25-2013, 04:17 PM   #9
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I do not know about MDS, but we had a discussion in another thread about how Wellington and Wellesley can beat index investing/rebalancing. However, this is over a long period such as 2 or 3 decades.

Nobody can beat the market every single year. The main reason is that the market can be extremely irrational in the short-term, and how is a rational and logical method going to compete with a mad man?
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Old 12-25-2013, 07:12 PM   #10
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The time period I'm talking about is 6 years. Using a concept (small cap value stocks) and applying a strategy (cheap companies making lots of money) is an investor's best bet to beat the corresponding index.

As demonstrated above, it's not enough. Over longer terms the stock picking strategy will most likely do worse. I guess we'll be sticking with our US small cap ETF for the best US small cap returns possible.
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AA = 60/35/5. Expected CAGR = 5.7%. GSD (5y) = 7.8%. USD inflation (10 y) = 1.8%. AWR = 3.0%. TER = 0.5%. Net Port Yield = 1.7%. Term = 36 yr. FI Duration = 4.9 yr. Portfolio survival probability = 86%.
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Old 12-25-2013, 10:56 PM   #11
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Quote:
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The time period I'm talking about is 6 years. Using a concept (small cap value stocks) and applying a strategy (cheap companies making lots of money) is an investor's best bet to beat the corresponding index.
If you look at morningstar's page for small-value funds, the vanguard small cap value index (based on MSCI) comes in at something like 106 out of 259 funds for 5 year returns. So there's a lot out there that did better than the market (defined as the index) even allowing for some survivorship bias.

Quote:
As demonstrated above, it's not enough. Over longer terms the stock picking strategy will most likely do worse. I guess we'll be sticking with our US small cap ETF for the best US small cap returns possible.
Personally, I follow a passive investment strategy. But there's a big difference between "likely" and "impossible".
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Old 12-26-2013, 07:59 AM   #12
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Quote:
Originally Posted by photoguy View Post
I think you need to be more precise about what you mean by "impossible", "beat", and "market". There are hundreds/thousands of funds that do better than the market (i'm also being loose with terminology).
'Hindsight is a wonderful thing...'
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Old 12-26-2013, 01:39 PM   #13
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During the 11 year period of 1995-2005 we used 16 individual "magic" stocks for our 80/20 portfolio. We crushed the SP500.

I thought I was a great stock picker. The fact is I was lucky with a huge risk tolerance. NOT a great stock picker.

At the end of every year since 2006 when we went to a passive indexed 60/40 portfolio I get this URGE to try and beat the market.

It's just my way of reminding myself that it is almost impossible to do what I did during those 11 lucky years.

Quote:
Originally Posted by haha View Post
Unless one is a professor, what is the payoff in trying to prove that one cannot beat the market?

Ha
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AA = 60/35/5. Expected CAGR = 5.7%. GSD (5y) = 7.8%. USD inflation (10 y) = 1.8%. AWR = 3.0%. TER = 0.5%. Net Port Yield = 1.7%. Term = 36 yr. FI Duration = 4.9 yr. Portfolio survival probability = 86%.
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