Article: The Hands-on Investor

[Focus]

Just read this New York Times article: "The Hands-on Investor."

First, it seems to be chronicling a trend: Financial advisors now want greater participation on the part of clients. Although it's promoted as a benefit to customers, I think it mainly helps the financial advisors -- they're hoping clients will be less likely to blame them if things go south. Call it no-fault financial planning.

“We think we’re going through a revolution with the democratization of knowledge,” Mr. Duran said. “Individuals know more, and they’re carrying it into our industry. Just as doctors had to change and travel agents had to change or disappear, our industry has to change.”

Then, the article shifts to a focus on self-guided investors, but limited only to stock traders and spotlighting, predictably, an "I increased my $100,000 nest egg to $3 million in 10 years through stock trading" individual.

Matthew Schifrin, author of “The Warren Buffetts Next Door” (Wiley, 2010) and an editor at Forbes, has followed what Mr. Koza and nine other self-taught investors have done. He said that what they had done was unusual — their returns were all astronomical — but that he believed the average person could learn enough to increase returns by up to 4 percent a year.

Any thoughts?

 

[kumquat]

Wanna play a card game?

An adviser in the Ridgewood, N.J., office of United Capital came up with a game called “Honest Conversations.” It is played with a deck of color-coded cards and the purpose is to get husbands and wives to think independently about what money means to them.

Who wins? Who loses?

 

[samclem]

Any thoughts?

Well, if the "advisors" can get the clients to churn their own accounts, the advisors (if on commission) might make even more money and avoid those legal headaches that sometimes occur.

Can clients improve their yield by 4%? From what baseline? It might not be very hard to do that. According to various studies, individual investors do much worse than the indexes. For example, according to Dalbar:

For the twenty years ending 12/31/2008 the S&P 500 Index averaged 8.35% a year. A pretty attractive historical return. The average equity fund investor earned a market return of only 1.87%.

Now, the S&P 500 is not an accurate representation of a diversified portfolio, but the general idea still holds. People tend to time their buying and selling based on emotions, and they tend to have too much confidence in the information on which they base their investment "picks." So, on average, they do worse than average. If they just set an asset allocation in low-cost funds or ETFs and mechanically rebalanced it, they could do far better than just "4% better than average investors". And they wouldn't owe Mr Duran a penny, and they wouldn't be reliant on mysterious "Masters" who have picked winners in the past.

 

[M Paquette]

Ah, to be in Lake Woebegone, where all the investors are better than average. [1]








1. Performance is computed before fees and expenses. Mental arithmetic may be applied to disregard losing positions. No actual detailed record keeping required to claim better than average results. Average for comparison may be based on Bangladeshi Butter Futures or Beaver Cheese market history, and need not be characteristic of the investments actually selected, the level of risk actually taken, or much of anything, really. Your mileage may vary. Some settling of content may occur during shipment. Sold by weight and not by volume.

 

[bcinvest]

For the twenty years ending 12/31/2008 the S&P 500 Index averaged 8.35% a year. A pretty attractive historical return. The average equity fund investor earned a market return of only 1.87%.

If the market averages 8.35% and a subset is averaging 1.87%, somebody is doing much better than 8.35%. Most of the research on investor performance I have seen is on investors who use mutual funds as an investment vehicle. It is no surprise they don't do better than the market.

In order for the market to be an average somebody is obviously doing better. I don't agree that the average investor could do 4% better each year because that implies the average return of the market would rise 4%. If everybody invested the same way we are back to the market return. Fortunately that will never happen. I would agree that select investors can tack on 4%. See Graham and Doddsville.

 

[bcinvest]

Ah, to be in Lake Woebegone, where all the investors are better than average. [1]

Many find it easier on their ego to believe that all investors are below average. To take that position is to ignore reality. If some are below average, some must by definition be above average. The financial services industry doesn't want to hear any of this type of talk because it goes against their marketing message that investing it to hard and better left to the pros. Just another self serving message aimed at enriching Wall Street at the expense of Main Street.

 

[ERD50]

. Most of the research on investor performance I have seen is on investors who use mutual funds as an investment vehicle. It is no surprise they don't do better than the market.

I recall reading that most of that under performance comes from people buying high and selling low. And I've seen it among people I know "(I can't take this market dropping day after day - I'm out!", "This stock is at an all time high - I'm getting in!"). Whether your vehicle is individual stocks, active mutual funds, passive indexes, or ETFs, buy-high-sell-low is going to hurt performance.

-ERD50

 

[Gone4Good]

If some are below average, some must by definition be above average.

While this is mathematically true, you're reaching a conclusion that isn't necessarily supported by that mathematical truth. There is nothing in the data that says the same people always underperform, or that the same people outperform. In fact, it is just as hard to underperform the market consistently as it is to outperform. The only caveat is that the drag of investment costs means we all underperform a costless index to some degree when taken as a whole.

 

[HFWR]

I'm an indexer, since [-]1902[/-] 2000. No individual stocks, with no particular plan to ever go that route again. Don't know/don't care what anyone else does... I do think, with due diligence, that "the market" can be beat by some. And not everyone who invests that way is a "trader", so the costs - not only trading costs, but tax implications - don't have to be high.

To watch CNBC, you'd think everyone is, or should be, a frantic, Cramer-like stock trader...

 

[samclem]

1. Performance is computed before fees and expenses. Mental arithmetic may be applied to disregard losing positions. No actual detailed record keeping required to claim better than average results. Average for comparison may be based on Bangladeshi Butter Futures or Beaver Cheese market history, and need not be characteristic of the investments actually selected, the level of risk actually taken, or much of anything, really. Your mileage may vary. Some settling of content may occur during shipment. Sold by weight and not by volume.

Thanks for that!

 

[kombat]

If some are below average, some must by definition be above average.

Sure, but an "above average" investor only has to make one big mistake to erase years of "above average" returns. He could be above average for 7 years running, then on the 8th year, bet it all on Bank of America. Statistically, he's still above average (beat the market 7 out of 8 years), but in real dollars, he's no better off than the proletariat.

The real winners, of course, are the banks and brokers, skimming fees off of every move we make.

 

[samclem]

The real winners, of course, are the banks and brokers, skimming fees off of every move we make.

Well, that's the ticket then, isn't it? Buy stock in the brokers and enjoy the dividends brought to you by active traders. Invest your money in index funds and enjoy the price efficiencies brought to you, for free, by active traders.

I used to try to talk folks out of this game, but now I usually only try to discourage the uninformed and the vulnerable. It's not practical to dissuade a brilliant, informed investor (chartist, ledger-reader, whatever) and it makes no one happy. Plus, they increase returns for everyone. Some people do very well at this, but discerning talent from luck is almost impossible. There are values out there, no doubt. Somewhere. As ERD50 points out, why should the winners spend the time to prove themselves? The only ones who would take the time to furnish proof are those trying to attract more capital to manage. For whatever reason, the flock of those able to produce solid evidence is few, and their powers always wane at unpredictable intervals.

 

[bcinvest]

While this is mathematically true, you're reaching a conclusion that isn't necessarily supported by that mathematical truth. There is nothing in the data that says the same people always underperform, or that the same people outperform. In fact, it is just as hard to underperform the market consistently as it is to outperform. The only caveat is that the drag of investment costs means we all underperform a costless index to some degree when taken as a whole.

What mathematical proof is acceptable? There is nothing in the data that says some can't consistently outperform.

You bring up a good point. the return of the market is the change in value of all companies less transaction costs. The less investors as a whole pay for transaction costs the higher the returns.

 

[Gone4Good]

There is nothing in the data that says some can't consistently outperform.

Except the 40 years of academic studies that have been dedicated to this topic since Fama published "Efficient Capital Markets" in 1970 and have generally come to the conclusion that winning stock pickers are the statistical equivalent of winning coin flippers.

 

[Nords]

Except the 40 years of academic studies that have been dedicated to this topic since Fama published "Efficient Capital Markets" in 1970 and have generally come to the conclusion that winning stock pickers are the statistical equivalent of winning coin flippers.

You would think that after 40 years of rigorous peer-reviewed academic analysis the "efficient market hypothesis" would be upgraded to "efficient market" or even "efficient market theory".

I suspect that the markets are neither as efficient as you insist, nor as easy as others insist.

But the market makers and stockbrokers... now there's efficiency!

 

[bcinvest]

Except the 40 years of academic studies that have been dedicated to this topic since Fama published "Efficient Capital Markets" in 1970 and have generally come to the conclusion that winning stock pickers are the statistical equivalent of winning coin flippers.

Relying on failed ivory tower finance theory is not the basis to prove anything. The idea of efficient capital markets has so many holes in it that it is useless. The flash crash is just one small example.

 

[nun]

What gets me is that most people approach investing in a very simplistic way, even the so called experts. They just think about return, risk and the the ultimate goal of their investing are often after thoughts. IMHO the most important factor in investment success is to LBYM so that you can maximize your savings and minimize your need for returns and risk

Any investor should first decide what they are trying to achieve; are they saving for a down payment, building an emergency fund or investing for retirement in 35 years time? Once that is done my approach is to figure out what return I'll need to meet my goal and set my risk/asset allocation to meet that goal. So the upshot of this is that I don't seek to maximize my return only to make enough to meet my requirements as any excess would carry unnecessary risk.

 

[FinanceDude]

Except the 40 years of academic studies that have been dedicated to this topic since Fama published "Efficient Capital Markets" in 1970 and have generally come to the conclusion that winning stock pickers are the statistical equivalent of winning coin flippers.

I don't think Benjamin Graham and guys like Peter Lynch were lucky stock pickers. So I guess Warren Buffet is lucky too? Maybe guys like these just do a lot of fundamental work and throw in a little guts and make it happen!

Buffet's investment success is well documented, NOt anecdotal, just take a close look at Berkshire's returns over 50 years.........

 

[bcinvest]

I don't think Benjamin Graham and guys like Peter Lynch were lucky stock pickers. So I guess Warren Buffet is lucky too? Maybe guys like these just do a lot of fundamental work and throw in a little guts and make it happen!

Buffet's investment success is well documented, NOt anecdotal, just take a close look at Berkshire's returns over 50 years.........

Where are all the modern finance experts with records like Buffett. Maybe Buffett is right when he ridicules efficient markets, diversification, beta, VAR and other nonsense.

 

[FinanceDude]

Where are all the modern finance experts with records like Buffett. Maybe Buffett is right when he ridicules efficient markets, diversification, beta, VAR and other nonsense.

Is Peter Lynch modern? What about Bill Miller at Legg Mason?

 

[haha]

What interests me most about these discussions is what motivates those members who keep arguing against the possibility of skill.

Why do you care? Since you do not believe in it, your path is easy. Buy an index. Why make 10s of posts attacking the ideas of those who do believe in a skill factor?

Why not just let the idiots get clobbered by their delusion?

In many different areas I have often been entertained by those whose main preoccupation seemed to be proclaiming that something or other was not, nay could not be, possible.

OK by me!

Ha

 

[bcinvest]

Is Peter Lynch modern? What about Bill Miller at Legg Mason?

No I was talking about the believers of modern finance theory. Where are all of the superstar investors that adhere to the modern finance dogma. There aren't any. Modern finance theory does not stand up to empirical testing.

 

[kombat]

Buffet's investment success is well documented, NOt anecdotal, just take a close look at Berkshire's returns over 50 years.........

But Warren Buffet didn't just buy a few shares in some companies that turned out to be undervalued. He didn't pick "winners" out of a crowd of also-rans. He bought whole companies, and took an active role in managing them. He changed their structure, their direction, their vision. He didn't magically select undervalued companies - he bought enough shares to take ownership control, and directly added value to the companies.

 

[kombat]

Where are all of the superstar investors that adhere to the modern finance dogma. There aren't any. Modern finance theory does not stand up to empirical testing.

Where are all the billionaire hedge fund managers who got there using technical analysis? Where are the financial mavens who successfully saw the 2008 crash coming (thanks to their ability to interpret the magic signals in the charts), and were positioned to profit enormously on the ride back up, all thanks to technical analysis and chartism?

 

[Major Tom]

What interests me most about these discussions is what motivates those members who keep arguing against the possibility of skill.

Why do you care? Since you do not believe in it, your path is easy. Buy an index. Why make 10s of posts attacking the ideas of those who do believe in a skill factor?

Why not just let the idiots get clobbered by their delusion?

In many different areas I have often been entertained by those whose main preoccupation seemed to be proclaiming that something or other was not, nay could not be, possible.

OK by me!

Ha

My take on this is that in any field there are quite a lot of folk who think they know enough in order to achieve success with that particular endeavor when in fact, they merely know enough to be a danger to themselves, and anyone else who would follow their advice. It is these folk who give active investing a bad name.

As a large portion of my portfolio is in a taxable account, I would like the advantages that a good knowledge of individual stock picking would bring me. However, I lack the necessary desire and skills to be good enough, so am staying clear of that approach, at least for now.