Stock Pickers - Jason Zweig

[ERD50]

Quote:

Originally Posted by brokrken Agree, I could just be lucky. A few points. The vast majority of the stocks I own are in the S&P 500 and the small amount that isn't hasn't contributed in any meaningful way to any over/under performance. So, this, along with the fact that I consider my alternative investment to be an S&P 500 fund is why I chose that as a benchmark. I also took total return (I think), as I used the balance of my S&P 500 fund to calculate the return, which includes dividends. I honestly the key has been that I have taken a long term view. I have actually only sold one stock during that time, but I have bought many, and grown positions during downturns. I have good, profitable companies that I have watched go through ups and downs and I think that has rewarded me in many cases. Fully agree this may change and my "luck" may run out, which is why I track it closely. I told myself if I ever consistently don't be my benchmark then I'll sell it all and by the fund. TBD...

Sounds reasonable, but it begs the question - wouldn't quite a few fund managers be able to replicate this? Yet, very, very few of them do.

-ERD50

[brokrken]

Again, no clue why they don't. I can only speak about my results.

[ERD50]

Quote:

Originally Posted by brokrken Again, no clue why they don't. I can only speak about my results.

Well, they are clearly very motivated.

I think they don't, because they can't.

-ERD50

[gerntz]

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Originally Posted by brokrken Sure, if you do no research, try and time the market, etc. that may be true. All I can say is that if I use my personal portfolio for the last 10 years (That's when I started picking stocks) as a real life example, I've beat the S&P 6/10. That doesn't seem like much, but when I did beat it, I beat it by a lot and when I didn't it was very close. Average return of my self managed is 3.5% higher than that of the S&P. A theoretical $100 in the S&P would have given me roughly $260 today vs $340 with my picks.

That sounds like work. You should retire.

[brokrken]

gerntz, haha, I wish. Got some years left before I get there.

[OldShooter]

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Originally Posted by ERD50 ... I think they don't, because they can't

In Winning the Loser's Game Charles Ellis makes this argument: The professional stock pickers are all brilliant and all equipped with vast resources and information. As a result they cancel each other out, leaving us with the random and unpredictable results that we see.

I'm not sure I buy it, but it's an interesting argument. And he's a guy with pretty good credentials.

For myself, I really don't need to know how the watch works. I just need to know what time it is. The S&P SPIVA and Manager Persistence scorecards tell me that.

[brokrken]

I'll come back often and update the group on my progress. YTD 2017, my picks +10.3%, S&P +6.4% as of close yesterday

[Totoro]

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Originally Posted by ERD50 Well, they are clearly very motivated. I think they don't, because they can't. -ERD50

Three common reasons why they can't:

• Funds are too big - harder to outperform managing billions
• Brokrken works for free, fund managers don't
• Fund managers that perform poorly a few quarters often face very strong pressure, so they protect the short term vs. long term

To name a few. Investing is a game where the little guy actually can have an edge. Still doesn't change the fact that most squander it, and there is so much noise it is hard to distinguish skill from luck. But the odds are actually a bit bitter being small, than being big. If one brings the skill ..

[photoguy]

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Originally Posted by OldShooter Edit: This article (New Fama-French Study Puts Managers Under Microscope | ETF.com) includes a link to the paper that Ken French mentions, Luck Versus Skill in the Cross Section of Mutual Fund Returns.

I read this paper (the actual paper, not the summary) a long time ago. It's a good paper and interesting read. It also explains why simple comparisons such as benchmarking ones portfolio against the S&P 500 is not the right thing to do.

As I recall, they did have evidence for a small amount of true manager (stock picking) skill. But it was mostly/entirely eaten up by the extra expense ratio. If you don't count that, it was still a tiny fraction of a percent of managers that outperform beyond chance. You have to pick these out the many managers that are outperforming by luck (odds so imbalanced that it would be hard to do).

However, one point I'd like to make with the Fama & French paper is that their model for benchmarking manager performance / stock picking skill is the 3 factor model with size and value (maybe it was the 4 factor adding momentum -- I don't remember). As an index investor, especially at vanguard, it's been hard historically to get exposure to size and value. So if you were investing 20 years ago, as an index investor, some strategies were simply not available to you. On the other hand, an individual stock picker could have pursued say a deep value approach, and even if he/she picked stocks at random (within the value subset), could have outperformed an indexer who didn't have access to a value fund (value stocks generally have higher expected returns).

Even today there are no index funds (or almost none) that track the momentum factor. And this factor has been known for at least 20 years now. An individual stock picker can pursue this approach and potentially do better without any skill.

It's easier now with the proliferation of ETFs and I'm sure some people have access to DFA funds, but if you look at bogleheads, there's a huge number of threads/posts about which index fund has the best "value" loading or "size" loading.

[brokrken]

Thanks for the back-up Totoro. My whole point in posting here was merely to say it can be done, I have proof over a 10 year period that it can be done, and I'm no genius.


By the way, I see you live in Utrecht. Great city. I work for Dutch company, so I'm over that way quite often.

[photoguy]

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Originally Posted by Boho The abstract says "If we add back the costs in fund expense ratios, there is evidence of inferior and superior performance (nonzero true [alpha]) in the extreme tails of the cross-section of mutual fund [alpha] estimates." That's what I figured - some funds outperform. I don't see anything about being unable to identify outperforming fund managers, but it's dense as you said.

It's in the paper, somewhere near the end. Paraphrasing the argument against being able to pick the skillful manager who outperforms goes something like this:

1. there are say 100 managers that have outperformed the market
2. but under random guessing, we'd expect 95 managers to outperform the market
3. therefore to pick the manager who is actually skillful, we'd only have a 1 in 20 chance

I don't remember the actual numbers, but they were probably worse than my example.

[Fedup]

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Originally Posted by gerntz W/o naming the funds & time frames & the data source, anyone can say anything.

Vanguard PRIMECAP family seems to be beaten the index in the last 10 years. That's long term to me.

[OldShooter]

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Originally Posted by Totoro Three common reasons why they can't: Funds are too big - harder to outperform managing billions Brokrken works for free, fund managers don't Fund managers that perform poorly a few quarters often face very strong pressure, so they protect the short term vs. long term To name a few. Investing is a game where the little guy actually can have an edge. Still doesn't change the fact that most squander it, and there is so much noise it is hard to distinguish skill from luck. But the odds are actually a bit bitter being small, than being big. If one brings the skill ..

I'm not so sure about that edge. Strong odds (I have read 95%) are that the little guy is trading with a professional on the other side of the table. The professional almost certainly knows the company better than the little guy and has access to vastly more information and resources. So if the professional has decided to sell to the little guy then he doesn't see upside in the stock vs other investment options. Conversely if he is buying then he sees upside that the little guy is walking away from.

And one of the efficient market theories says that the current price is the consensus opinion of thousands of traders, each of whom probably has all the public information on the stock, so so the price is likely to be correct. If so, then anything that anyone (not just the little guy) wins or loses is strictly luck -- unanticipated/unknown future events or information.

[tulak]

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Originally Posted by ERD50 Sounds reasonable, but it begs the question - wouldn't quite a few fund managers be able to replicate this? Yet, very, very few of them do. -ERD50

On average, they can't, because they are chasing performance. Plus, they are dealing with (hopefully) a lot more money.

On the last point, this is why Buffett doesn't perform as well now as he did in the past. It's a lot easier to invest small amounts of money than large amounts.

Editing to add: +1 to Totoro. Mostly what I said, where chasing performance = I need short-term results.