Some Active beats Indexing

[Running_Man]

TLT has outperformed BRK since Oct 2008

 

[youbet]

Yes, one should be sure to include dividends when comparing stocks.

According to Morningstar, a $10K invested 5 years ago would grow to $17,130 in VFINX (Vanguard flagship S&P MF), and $17,253 in BRK. So they run neck-to-neck the last 5 years.

Yes. To clear up any confusion (particularly what things "look like" to G4G ) I grabbed this chart from Schwab. Orange = S&P 500 with divs reinvested. Blue = BRK/B. Y axis = growth of $10k. Data as of 01April16. As you said, it appears BRK/B ran neck and neck with the S&P 500 the past five years.

Thanks for the additional info. Yes, Warren has quite the historical record.

Total Return BRK/B

• 1 Year
  -1.4%
• 3 Year
  +36.1%
• 5 Year
  +72.8%

The Total Return is the rate of return representing the price appreciation of a stock with cash dividends reinvested on the ex-date for the most recent 1, 3 and 5 fiscal years.
This growth of $10,000 graph represents the growth of a hypothetical investment of $10,000. It assumes reinvestment of dividends on ex-date.

 

[youbet]

That chart doesn't look like it includes dividends. And that's a huge illusory advantage for non-dividend paying companies like Berkshire.

Total returns for Vanguard's 500 Index are 73% over the last five years instead of about 50% shown in the chart. BRK looks like it's up about 60% over 5 years, so trailing the S&P 500 total return.

Good catch. Indeed the "Thumbcharts" chart does not include reinvested divs for the S&P500. My bad.

It looks like Thumbcharts did get the BRK/B line OK though. You eyeballed it at about 60% but when I literally held a scale to my computer screen, it does look more like 70%. And it turns out the 5 yr return as of April 1st was 72.8%.

 

[NW-Bound]

I just saw an article about the performance of Yale endowment fund. See chart below.

Not all the growth came from investment returns, as it includes new donations. However, I doubt that the fresh money amounts to much in later years when the fund got so large.

Look how little the fund dropped during the recession of 2002-2003 and the Great Recession of 2008-2009, compared to the S&P. However, it has not grown as strong in the last few years.

 

[garyt]

I posted this on another thread, but active fund managers are handicapped by the very people who invest in them. I see it all the time at work. When the market goes down, people panic and shift out of stocks. When the market skyrockets, they go all in. They're basically forcing the managers to sell low and buy high.

 

[Gone4Good]

Even a completely random exercise of coin flipping, if done by enough people, will produce a distribution where some consistently "beat the average." Many will attribute that success to superior coin flipping skills.

What's shocking about investing isn't that we can point to a handful of managers who beat the averages. What's really shocking is how few we can point to that do.

According to Morningstar Vanguard's S&P index beat 86% of large cap domestic equity funds after 1 year, 89% after 3 years, 91% after 5 years, 84% after 10 years, and 75% after 15 years.

That's not a distribution you get from an exercise where skill plays a significant roll in determining the outcome. That's not even a distribution you get from random chance. That distribution describes a situation where the odds are considerably stacked against the active manager.

 

[NW-Bound]

I posted this on another thread, but active fund managers are handicapped by the very people who invest in them. I see it all the time at work. When the market goes down, people panic and shift out of stocks. When the market skyrockets, they go all in. They're basically forcing the managers to sell low and buy high.

This has also been my opinion. Not just during market downturn, but during the mania periods if they do not join with the crowd they will trail the market. Their holders will redeem and put the money where the managers load up on hot stocks.

What this means to me is that if you want to be a contrarian, you need to do that yourself. Nowadays, that's easy to do and stay diversified at the same time using ETFs.

The above said, indeed it is difficult to beat the market consistently. But to say that the few who are consistently successful are simply lucky is to lower them to ordinary status, to be more like ourselves. Are Nobel prize winners, Olympic champions, etc... just lucky? Yes, outstanding results usually require some luck, but not every success is like throwing coins.

 

[photoguy]

Look how little the fund dropped during the recession of 2002-2003 and the Great Recession of 2008-2009, compared to the S&P. However, it has not grown as strong in the last few years.

Is the data behind the graph even meaningful? I thought Yale had a huge portion of their endowment in illiquid assets that can't really be marked to market like a traditional stock/bond portfolio.

I used to have Swenson's book but I never read it. Maybe I would know the answer if I had.



Sent from my iPad using Early Retirement Forum

 

[NW-Bound]

This could be true, and the reason for the fund holding value during the last two recessions. Private investments are not marked down drastically like common stocks.

But then that begs the point: I have had two opportunities since 2000 to load up on cheap marked down stocks, and why am I not having a lot more money?

It is indeed difficult to go against the crowd, and when they panic you think perhaps they know something you don't. Indexing is just that: follow the crowd and do not ask questions.

 

[Mulligan]

Is the data behind the graph even meaningful? I thought Yale had a huge portion of their endowment in illiquid assets that can't really be marked to market like a traditional stock/bond portfolio.

I used to have Swenson's book but I never read it. Maybe I would know the answer if I had.



Sent from my iPad using Early Retirement Forum

Thanks for sharing what I was thinking as I was going on my memory which isn't the smartest thing for me to do. I read an article a few years ago about their portfolio when they were having the great success and it appeared to resemble little what I would be able to mirror.

 

[Gone4Good]

But then that begs the point: I have had two opportunities since 2000 to load up on cheap marked down stocks, and why am I not having a lot more money?

It is indeed difficult to go against the crowd, and when they panic you think perhaps they know something you don't.

I'd add that massive market sell-offs are not always irrational or an indication of panic. The 2008/2009 drop was completely justified based on the distribution of potential outcomes. Buying at the bottom required more than just a contrary spirit or a calm assessment of the fundamentals, it required an act of faith.

 

[Senator]

If you are trying to beat the 'index', whatever that is, just buy the index. I buy S&P 500 shares through IVV at Fidelity. No cost to get in, or out.

I am near guaranteed to match the index. My dividends are ~2.25%, always reinvested. There are never any capital gains, only the qualified dividends. I do not have to re-balance and pay any capital gains.

When I was more of a trader I worried about the recent drops in the market. Now they are just a blip, and I keep my investing schedule. I sleep better too. I have nearly $2K a month in dividends now, shooting for $3K per month by the time i am 62. When I was trading stocks, not many dividends, and much more losses.

Some fund managers can beat the index, most cannot beat it year over year. Even BRK doesn't beat it most years. And there is no income, so you always have to sell to get income. There are always schemes, gimmicks and snake oil salesmen that will have a guaranteed way to "get rich fast", but index investing makes it work easier.

 

[dixonge]

If you are trying to beat the 'index', whatever that is, just buy the index. I buy S&P 500 shares through IVV at Fidelity. No cost to get in, or out.

I am near guaranteed to match the index. My dividends are ~2.25%, always reinvested. There are never any capital gains, only the qualified dividends. I do not have to re-balance and pay any capital gains.

So basically you always beat the index by 2.25% - not bad!

 

[Senator]

So basically you always beat the index by 2.25% - not bad!

It depends on how everyone calculates the index... Sometimes they count dividends reinvested, sometimes, not.

In 2016, it should be easy for anyone to beat the S&P index, even fund managers.

The S&P index went down so fast, that any amount purchased in the first two months will beat the index if it winds up positive, or flat. That's a 66.67% chance of beating it. I put most of my $24K of my 401K in by the end of Feb, so that amount is way ahead of the index.

 

[Mulligan]

So basically you always beat the index by 2.25% - not bad!

That reminded me a few months ago, where a CNBC reporter let a fund manager conflate an issue and get away with it. Reporter questioned fund manager why his fund trailed the S&P 500 the previous year. Manager said he did slightly but counting the dividends he actually beat the index. Reporter should have said, well after counting the S&P dividends you trail again.

 

[Gone4Good]

In 2016, it should be easy for anyone to beat the S&P index, even fund managers.

The S&P index went down so fast, that any amount purchased in the first two months will beat the index if it winds up positive, or flat. That's a 66.67% chance of beating it.

You underestimate the incompetence of active fund managers . . .

Bloomberg: It was a stockpicker's market; too bad about the stock picks

By some measures, active managers got what they’ve been hoping for in 2016, at least on paper: correlated moves among equities unwound to the lowest levels since 2012 and breadth, or the number of stock advancing, came roaring back. Both are viewed favorably by anyone trying to beat an index.

Those gifts proved illusory as fund managers trailed benchmarks by one of the highest rates in two decades. The reason: stocks they avoided went up, and the ones they owned went down.

 

[NW-Bound]

I'd add that massive market sell-offs are not always irrational or an indication of panic. The 2008/2009 drop was completely justified based on the distribution of potential outcomes. Buying at the bottom required more than just a contrary spirit or a calm assessment of the fundamentals, it required an act of faith.

The above is an argument from the EMH proponents, more than from the indexers. The most ardent followers of EMH will say that there's really never any mania. When a tulip bulb is priced the same as a farm, the market says it should be so, and the market is always right.

I think EMH and market indexing both have valid points. However, I am not going to follow the crowd blindingly. I am not going to deny myself the privilege of asking questions. It's the same reason we vote and do not just allow the crowd to decide for us. Oui?

Come to think of it, investing is when one is really free from the tyranny of the crowd, compared to public elections. Whether you agree with the majority or not, once an election result is in, it is binding on everyone. In investing, you are free to vote with your money. And in some rare occasions, you can make out like bandits. Those opportunities are indeed uncommon, but if you were a lemming you would not allow yourself to make a judgement call.

 

[Gone4Good]

The above is an argument from the EMH proponents, more than from the indexers.

No, it's an argument specifically about the 2008/09 financial crisis and has nothing at all to do with EMH.

We can go through loads of specifics, but "relative value" and "fundamental" analysis basically broke down because all of the benchmarks became questionable and unsound.

As some examples: what are houses worth if there is no mortgage market? How then do we value bank balance sheets loaded with mortgage related assets? How much are corporate assets worth if otherwise solvent companies go bankrupt because they lack liquidity and are forced liquidators? How much is anything worth when unemployment heads into multiple double digits?

These were all live questions in 2009.

I worked on a credit trading desk at an investment bank at the time. I spent many of hours talking with corporate treasury departments about how they would keep funding themselves as the Commercial Paper markets shut down. Pretty much the conversation went like this:

"So you only have about $30MM of cash on hand, and about $400MM of CP outstanding. How are you going to finance yourself if you can't roll over your CP?"

"we have back up revolvers (i.e. bank lines)"

"Well what happens if the banks can't fund you?"

"that's not going to happen"

"Who's leading your lending group?"

"Well, it's Bank of America and Citi?"

"Did you see that Citi's stock price is down to $1 per share and BOA isn't much better?"

"We know."

-----
So how much is that company worth? Assuming they get liquidity, quite a lot more than if they don't. Now multiply that by lots and lots of companies. What you end up with is binary market values that are wildly different and both completely reasonable.

 

[youbet]

The discussion in this thread seems to equate "indexes" with "broad indexes." For example, many are comparing the performance of some actively managed MF with the S&P 500 index. Seems like a good idea.

But what about the folks who own 100% index funds but their portfolio includes a variety of more focused index funds? You know...... dom small cap value, various commodity indexes, regional international indexes, market segment indexes (I'm in the midst of getting burned owning an energy segment index etf right now!) and on and on.

Has anyone seen statistics on how individuals who own a variety index funds as opposed to only owning the S&P 500 do? How to folks who actively diversify their portfolios with a variety of index funds do vs. folks who stick to only owning the S&P 500 or the TSM?

You can be a 100% indexer and be totally out of whack with the S&P 500 index, or any of the many domestic large cap indexes and their corresponding index funds, right? Is anyone who owns anything other than SPY, VTI (or equivalent) doomed to under perform due to not just buying and holding the S&P 500 or the TSM?

 

[NW-Bound]

As I mentioned in an earlier post,

Eh, indexing is the PC thing to safely say nowadays.

Plus, my index beats your index. And then, my rebalancing method is superior to yours.

 

[Senator]

Has anyone seen statistics on how individuals who own a variety index funds as opposed to only owning the S&P 500 do? How to folks who actively diversify their portfolios with a variety of index funds do vs. folks who stick to only owning the S&P 500 or the TSM?

Is this close to what you are looking for?

But we also know that most individual investors are horrible investors. In fact, a recent study by Richard Bernstein showed that the average investor generated a measly 2.1% return over the period from 1993-2013:

http://www.rbadvisors.com/images/pdfs/toward_the_sounds_of_chaos.pdf

 

[gcgang]

Average investor only did 2%? I'm sure everyone here did better than that. We must've all lived in Lake Woobegon.

 

[OrcasIslandBound]

Why does the "average" investor earn just 2%? It is because they are market timers.

Sent from my Nexus 4 using Early Retirement Forum mobile app

 

[DrRoy]

The discussion in this thread seems to equate "indexes" with "broad indexes." For example, many are comparing the performance of some actively managed MF with the S&P 500 index. Seems like a good idea.

But what about the folks who own 100% index funds but their portfolio includes a variety of more focused index funds? You know...... dom small cap value, various commodity indexes, regional international indexes, market segment indexes (I'm in the midst of getting burned owning an energy segment index etf right now!) and on and on.

You can be a 100% indexer and be totally out of whack with the S&P 500 index, or any of the many domestic large cap indexes and their corresponding index funds, right? Is anyone who owns anything other than SPY, VTI (or equivalent) doomed to under perform due to not just buying and holding the S&P 500 or the TSM?

This is right. Most of the discussion here is in regard to the S&P 500 index, which is by far the most used index target for ETF's and funds. The broad discussion also presumes buy and hold. Look at Senator's post yesterday with the chart. If one is using an array of narrow indexes, there is likely some trading going on as well, and overall return is likely to suffer over the long haul.

 

[jim584672]

BRK-B nudges out SPY/VTI, not by much though.

Five year total returns:
SPY 69.94% / VTI 66.41% vs. BRK-B 72.17%