Better to be lucky than good?

[h2xblive]

Ok, so you usually read and hear that an investor shouldn't try to time the market, they should take a longterm, disciplined investing approach, etc.  However, there are many people who invest that easily beat the market.  Are they just good at researching?  Do they have insider knowledge?  Or are they just the lucky few who end up on the right hand side of the bell curve, by default?

For example, Peter Lynch, this guy: http://www.kirkreport.com/portfolio2005.html and I'm sure there are many of you here that have obtained returns on your investment of 20%+ consistently for the past 5+ years.

 

[Cut-Throat]

No. They either are very bad at math or are lying.

 

[LOL!]

Or they pick selected accounts or stocks to report. For example, just look at the YTD returns posted from time to time here on this message board. While many of the YTD returns are believable, you see all kinds of mistakes:

(1) Folks include their contributions as if they are part of investment return.
(2) Folks do a past 12-month return, not a YTD return.
(3) Folks pick their best stock or IRA or their 401(k), but not the whole enchilada (all retirement, all after-tax, all checking, all savings, all bonds, etc)
(4) Folks neglect to include the funds sold at a loss and no longer showing up in their software
(5) Folks report "It's just what Quicken/MSMoney/Excel/Vanguard reports, so it must be correct." without thinking of garbage-in/garbage-out.

 

[AltaRed]

(5) Folks report "It's just what Quicken/MSMoney/Excel/Vanguard reports, so it must be correct." without thinking of garbage-in/garbage-out.

Agree that people play loose and fast with data as I have myself concluded in such threads, but I tend to disagree with (5) above. I can say that Quicken 2002 at least is accurate on YTD investment returns IF a person selects "Current Year" in their "Investment Performance" report. It calculates cash ins and outs and timing of such in an annualized pecentage return basis. Selecting YTD is a worthless report.

One key flaw is that one cannot include "Bank Accounts" in the investment performance calculation and most (all?) of us have an ING or Emigrant type account for near term cash flow reserves.

 

[mathjak107]

its like las vegas.your only a winner until your not!.....with the market rising 2/3's of the time and falling only 1/3 right out of the box a timer has the house stacked against him

 

[unclemick]

Hmmm - I've posted versions of this before:

It only takes one great stock (Ben Graham, postscript section of the Intelligent Investor) or a few (Warren Buffett) to fund a lifetime. I know two - one with JNJ and one with Home Depot.

Here's the rub - which one and do you have the cash AND THE COURAGE to buy at the time.

The best attempt to quantify your odds I've seen is William Bernstein's 15 Stock Divifersification Myth - ??about one in 6.
That keeps 'the game afoot' - books, newsletters, loudmouths, etc, etc.

Investing since 1966 - I have periodically been an investment genius and a legend in my own mind on many an occasion - gave back to Mr Market or spent the money(since I could get more where that came from).

Depending on how I count my RE - sold and consumed early on - boring as paint dollar cost averaging into 401k and IRA (S&P, GIC's) over a long period funded 80-90% of my ER.

Have some nice memories of sports cars, dirty blondes, high living way back when I was a - er ah great stock picker.

It's male(not always), hormonal, incurable and perennial.

There are enough winners every generation to keep the game afoot.

heh heh heh heh - he who keeps 15% in individual stocks.

 

[rmark]

Alfred Cowles researched financial newsletters in the 1930's, and discovered they were mostly useless. And they still are.

 

[justin]

If 100 people go out and each buys a random basket of 10 stocks, there will be a good number of them that outperform the market. Maybe 30%, maybe 40%, maybe 60%. It's just statistics and probability. When you throw in frequent trading like the "hot stocks" mutual funds do (with average holding periods of under 4 months in many cases), you reduce the chance to outperform due to associated trading and transaction costs.

 

[cute fuzzy bunny]

That 'persistence' thing is a problem too.

Looking at the world of professional investors, it appears you can count the number of fund managers who 'beat the market' with persistency on one hand. Lynch barely was beating the market towards the end of his run at magellan, and he was only doing it by thrash trading. Buffet does it by purchasing bargain basement stocks and companies and fixing the management. Bill Millers run appears to me to be nothing more than the luck of the draw.

My ten year numbers are pretty dang good considering I had some triple digit returning years in the late 90's and then got out and kept all the money. I'd have to have a lot of pretty substandard sequential losing years to come back to annualized "market" returns. But that had little to do with skill and more to do with riding a wave of idiocy, just not riding it as long as others...

 

[h2xblive]

what's "thrash trading?"

 

[cute fuzzy bunny]

He saw that his 'record' was returning to the market mean and started turning the Magellan portfolio over at a huge rate, buying and selling on small twitches in a broad variety of stocks. About as extreme an example of "day trading" as you can imagine. Burned himself out doing it.

I think Bernstein covered it in detail in "the four pillars of investing".

 

[Nords]

He saw that his 'record' was returning to the market mean

Fund bloat-- the curse of every successful investment manager.

 

[cute fuzzy bunny]

Yeperdoodles.

 

[justin]

Yeperdoodles.

Gabe, untie your Cute n Fuzzy father. He needs his keyboard back to post more inane crap on the internet.

 

[azanon]

Its better to be lucky. Watch the movie Matchpoint if you dont believe me.

Azanon