Retail Investors Badly Trailing the S&P 500

[NW-Bound]

I already explained it (as did others). Investor A is not invested when an asset increases in value: they will trail expected returns. Somebody that is invested during this time is not beating expected returns, they are merely matching them...

When you say someone not being invested, are you talking about him selling low, or someone who stays on the sideline and not being a participating player?

If the latter case, how does someone lose -27.49% while the market loses only -11.31%?

But bringing these numbers up again tells me something that should have been obvious. That is, in a down market, you can beat it by losing LESS than the market even if you don't buy low. How?

In a bear market, an investor can beat the market by not owning any of the high-flying stocks that are now beaten down bad. That's my own portfolio.

 

[Markola]

+1. Yet another advertisement for buying, holding and keeping expenses low with index mutual funds.

 

[mrfeh]

When you say someone not being invested, are you talking about him selling low, or someone who stays on the sideline and not being a participating player?

If the latter case, how does someone lose -27.49% while the market loses only -11.31%?

But bringing these numbers up again tells me something that should have been obvious. That is, in a down market, you can beat it by losing LESS than the market even if you don't buy low. How?

In a bear market, an investor can beat the market by not owning any of the high-flying stocks that are now beaten down bad. That's my own portfolio.

Sorry if you can't understand this. I'm done trying to explain.

 

[NW-Bound]

It looks like mrfeh did not bother to read my post.

OK, for someone else, it is obvious how someone can beat or trail the market, even if he is not trading. That is done simply by holding different parts of the market. It's that simple.

Back to the numbers. From 11/01/2021 to 04/12/2023, the S&P is down -11.31%. Someone who buys-and-holds Tesla is down -50%. There are plenty of other tech stocks that are beaten down a lot worse.

If you do not own these high-flying stocks, you beat the market in the above period. Simple.

Of course, a Tesla shareholder who bought way back 5 years or more still beats the S&P.

I never own Tesla shares or any high P/E stock, but just point this out to say that it is perilous to own these stocks. But that should be obvious too.

 

[NW-Bound]

And for the above period of 11/01/2021 to 04/12/2023 where the S&P is down -11.31%, here are two defensive sectors that are up: pharmaceuticals and utilities.

PPH (pharma ETF) is up 5.79%, while XLU (Utility ETF) is up 2.96%. And these are before dividend payout.

Market timing is hard, but if one can shift between defensive and offensive positions at the right time, he can do OK. And you can do it with sector ETFs and not individual stocks. But even this is hard.

 

[MichaelB]

OK, for someone else, it is obvious how someone can beat or trail the market, even if he is not trading. That is done simply by holding different parts of the market. It's that simple.

Increased concentration gives you greater upside but at the expense of greater risk. Greater risk means greater outperformance is simple. Of course, the downside potential is also greater.

And for the above period of 11/01/2021 to 04/12/2023 where the S&P is down -11.31%, here are two defensive sectors that are up: pharmaceuticals and utilities.

PPH (pharma ETF) is up 5.79%, while XLU (Utility ETF) is up 2.96%. And these are before dividend payout.

I think the sector that increased the most over this period was energy.

 

[NW-Bound]

Increased concentration gives you greater upside but at the expense of greater risk. Greater risk means greater outperformance is simple. Of course, the downside potential is also greater.

Yes.

People who are indexers only think of one parameter when it comes to investing: what should their stock AA be?

When it comes to "active trading", they think of adjusting their stock AA. They forget that other investors can make out like bandits with individual stocks, or lose their shirts and shorts.

I think the sector that increased the most over this period was energy.

Heh heh heh... And I have plenty too.

Lemme look at my Quicken screen going down in alphabetical order: CPE, CVI, CVX, DINO, DVN, EURN, FCG, etc... A lot more to go to get to XOM. And of course, I also have the ETF XLE.

Only if you have a strong stomach, because these stocks are darn volatile compared to the tamed pharmas and utils.

I should be rich, but these gains are canceled out by the loss of my semi stocks. And no, I never own the high P/E Nvidia.

 

[OldShooter]

If you think consistently moving higher is the definition of "randomness", then I think you misunderstand the word.

Random movements are directionless or without a pattern.

Stock movements reflect a clear pattern. Values grow and stock prices move higher over time.

You are correct. It is, however, a very useful first approximation to assume that short-term prices are random and it fits the results data very well.

In fact, the distribution of prices is fairly complex and unknown in its details.* Unlike a normal or Gaussian distribution it is asymmetric with fat tails; the tail to the left (downwards) is fatter than the right tail. This makes a standard deviation calculation mathematically meaningless despite its popularity.† Prices are path-dependent to a degree, too. This is why it is possible to identify small momentum effects. Path dependency is anathema to pure randomness. But, as you say, there is a long term upward bias. This is why buy and hold works. (and virtually nothing else does.)

On the subject of making money with sector bets, there is nothing easier. In the rear-view mirror. Through the windshield, however, it is a different matter. A few quality minutes with a quilt chart will illustrate. (https://www.callan.com/periodic-table/) Pick any column, cover the columns to the right, and attempt to predict what just the first column to the right will look like.

---------------------------------------------
* Nassim Taleb has observed, amusingly, that if you do not know what a distribution is a priori, you cannot know how many samples are needed to characterize it. I recall a video (sorry not the link) where Eugene Fama bemoans the fact that he has only 100 years of data.
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† This is why we laugh at so many "100 year" floods, too. The erroneous assumption is that the weather is Gaussian.

 

[NW-Bound]

The day-to-day stock movement is really crazy. Take for example, UNH (United Healthcare), a stock I hold.

It has been running up the last month. Last Friday, it dropped -4% or so, before recovering. What happened?

UNH reported earnings. Good numbers. Issued good guidance for the next quarter. Not good enough to beat high expectations apparently. Hence the stock dropped. Crazy stuff.

 

[Out-to-Lunch]

They forget that other investors can make out like bandits with individual stocks, or lose their shirts and shorts.

Very presumptuous of you. We don't FORGET those facts. We intentionally choose not to take risks that could be diversified away. We accept the average market returns on the predicate that they are generally good enough to meet our needs.

 

[NW-Bound]

Very presumptuous of you. We don't FORGET those facts. We intentionally choose not to take risks that could be diversified away. We accept the average market returns on the predicate that they are generally good enough to meet our needs.

OK, not you personally. I apologize for generalizing.

It is true that stock picking and market timing is hard. But some people, myself included, still try. For me, it's for the challenge and the fun. So far so good.

One thing I have learned over the years is that overconfidence kills. We read about superb mountain climbers falling to their death all the time. Nope, I am too chicken. No high P/E stock.

Heh heh heh... A chicken stock picker and market timer. Heh heh heh... You see it here first.

 

[OldShooter]

The day-to-day stock movement is really [-]crazy[/-] random. ...

FTFY

 

[NW-Bound]

Ah, crazy or random, call it what you like, but it is mostly unpredictable. Day-to-day movement that is.

But then, a true random phenomenon like Brownian motion does not return to an equilibrium, like stock prices do.

A stock cannot stay high P/E forever. What's hard to predict is when its P/E falling back down to the average of the S&P.

Of things that I dislike in life, high P/E stocks or stocks that have no E are among the list. The risk is not worth it for me.

 

[padlock]

I remember reading an article explaining that short term trading is essentially a zero-sum game, whereas long term investing is not.

 

[NW-Bound]

Ah, crazy or random, call it what you like, but it is mostly unpredictable. Day-to-day movement that is.

But then, a true random phenomenon like Brownian motion does not return to an equilibrium, like stock prices do.

A stock cannot stay high P/E forever. What's hard to predict is when its P/E falling back down to the average of the S&P...

Ah, I realized I did not say something right.

A gas molecule under Brownian motion does not return to its initial position. That's what I meant. I should not have used the word "equilibrium".

What in fact happens is that the diffusion caused by Brownian motion will disperse matters. The "stuff" eventually gets to an equilibrium state when everything gets thoroughly blended up.

A high P/E stock once fallen from grace rarely reclaims its previous nosebleed P/E. If the company remains successful, its E will continue to grow, but if that is not a spectacular growth, the P/E will drop such that the P is stagnate.

Then, similar to the Brownian motion, in the long run, all high-growth P/E stocks will become like your average stock. Of course people still like to predict that peak, and think they will get out at the top. Only some will succeed.

 

[OldShooter]

I remember reading an article explaining that short term trading is essentially a zero-sum game, whereas long term investing is not.

Yes. @Montecfo's point in post #18. The finance/economist folks refer to short-term traders as "noise traders." Long term is different because of the steady but weak drift of the market upwards. Buffett says if you won't feel comfortable owning a stock for 10 years, you shouldn't own it for 10 minutes.

 

[NW-Bound]

... Buffett says if you won't feel comfortable owning a stock for 10 years, you shouldn't own it for 10 minutes.

And that's why Buffett stays away from hot stocks, because he cannot tell if they will stay hot for the next 10 years.

Earlier, I talked about Tesla and the S&P. Just now remember to look up the following info. The S&P committee voted to add Tesla to the S&P 500 on Dec 21, 2020.

From 12/21/2020 to 4/14/2023: S&P up +11.54%. Tesla down -20.14%.

And the difference is even higher if I bothered to look up the S&P dividend (Tesla pays no dividend).

What the above shows is that Tesla has held down the S&P 500. The S&P selection committee is a bunch of Johnny come lately. Tesla's heyday was already past when they added it.

Some of late additions like the above happened in the 2000 dotcom too. Many "new economy" stocks were added to the S&P 500 before the whole thing collapsed. Interested people can look this up.


PS. I just reminded myself that one of my stocks, Bunge (BG), was recently added to the S&P 500 to replace SVB, the bank that went belly up.

Should I sell BG now? Thinking about it... Maybe start to sell more close-in covered calls, and if they get assigned, say goodbye.

 

[NW-Bound]

... NB, this idea that the market is close to random was, for me, a very heavy lift. How could that be? Well, the interview with Ben Graham in 1976 (close to his death) comes close to explaining.

The guru of value investing: " ... I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors [The Efficient Market Hypothesis}."http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Benjamin%20Graham/A%20Conversation%20with%20Ben%20Graham%20-%20Financial%20Analysts%20Journal%20-%201976.pdf​

When Graham wrote the above in 1976, there was no Internet, no Reddit. The word FOMO did not exist.

And now, we have the silly phenomenon of meme stocks, of kids buying throwaway stock shares and hoping they "would go to the moon", of them exhorting each other to HODL. They eventually learn that fundamentals still matter, that companies must make earnings for their share prices to retain a value.

No, you can't just buy what the "other guys" are buying, and follow the "wisdom of the crowd". I see more examples of the "folly of the crowd".

“Crowd folly, the tendency of humans, under some circumstances, to resemble lemmings, explains much foolish thinking of brilliant men and much foolish behavior.” ― Charles T. Munger

 

[Exchme]

Remember the DALBAR study is marketed to Advisors. I have no idea whether it is done correctly or not but I'm a little skeptical since it gives Advisors a nice talking point that the Advisor will prevent those behavioral problems, so investors will overlook those pesky fees.

For instance, according to the DALBAR website:

​

The study utilizes mutual fund sales, redemptions and exchanges each month as the measure of investor behavior. These behaviors reflect the “Average Investor.” Based on this behavior, the analysis calculates the “average investor return” for various periods. These results are then compared to the returns of respective indices.

​

QAIB uses the aggregate balances of mutual fund investors each month to calculate investor profits or loss after all performance limiting factors are considered. This reflects the market gain or loss that the average investor would see on a statement.

Seems like if folks migrated to ETFs or chose to hold individual stocks or bonds, that reduces mutual fund balances and ends up counting as poor returns of average investors. But maybe I'm overly skeptical, is the study better explained somewhere?

 

[NW-Bound]

^^^ I never heard of DALBAR, but perhaps financial advisors may be helpful to ease the angst of weak investors during bear markets.

Similarly, doing indexing is useful to help people staying diversified, to keep them from succumbing to FOMO and putting all their money into meme stocks.

 

[Montecfo]

Dalbar's study has been out there close to 30 years. Its conclusions are not new.

 

[OldShooter]

Dalbar's study has been out there close to 30 years. Its conclusions are not new.

The exceptionally poor performance of individual investors is not news. A few years ago when I was developing my Adult-Ed investing class I spent a bunch of time with a TDAmeritrade branch manager. At that time TD's business focus was on day traders. After an hour or so we were pretty comfortable with each other, so I asked: How did your day traders do in the market last year?" There was a long, embarrassed pause, then she said "One and a half percent." That would have been 2017, when the market indices were up between 20% and 40%.

 

[yakers]

PS. I just reminded myself that one of my stocks, Bunge (BG), was recently added to the S&P 500 to replace SVB, the bank that went belly up.

Should I sell BG now? Thinking about it... Maybe start to sell more close-in covered calls, and if they get assigned, say goodbye.

Sort of the opposite of the 'Dogs of the DOW'?

 

[NW-Bound]

Talking about FOMO, back in 2000 the stock market was going like mad, and it got me really worried. It felt so wrong, but I did not know enough then that I should sell off my highest flying stocks, which were in semiconductors and Internet and network hardware (Cisco, RFMD, Conexant, Ciena, Global Crossing, etc...). I thought I was safe because I did not own any dotcom. Wrong!

That was the time I lost sleep, trying to figure out what to do. I read Malkiel's "A Random Walk down Wall Street" and other financial info, particularly from contrarians who said it would not end well. Still, it was FOMO that kept me from sell, sell, sell...

Anyway, that was the time when I read interviews with several MF managers. They lamented that their shareholders exhorted them to buy, buy, buy more tech stocks. If their return trailed the NASDAQ, then their constituents would redeem to move money into hot mutual funds like various Janus funds. And so, indirectly MF managers succumbed to FOMO too.

I remember reading one MF manager who got into trouble with keeping a few percent of portfolio in cash, to take care of possible redemption so that he did not have to sell his stocks at the wrong time. He said some shareholders called in to his office, and yelled that he should be 100% invested. They said that if they wanted to keep cash, they would not send their money to them.

Still, all that info kept me from reducing my holdings of beloved tech stocks. How could I? These were the disruptive technology stocks, were they not?

When the NASDAQ dropped, and eventually got down to 1/4 of its high, I lost a lot of money, something like 1/2, but I slept much better. Things make sense again, and the rational world felt a lot more comforting. I hate living in a crazy world.

Sort of the opposite of the 'Dogs of the DOW'?

I was joking and making fun of the S&P 500 adding good stocks which then turn bad.

But at this point, BG's fundamentals are OK, and I will not do anything.

 

[Al18]

Individual investors keep hearing diversify from the experts. SP500 did some stupid things last year - the largest 8 companies accounted for 28% of the drop last year. Some smart investors sold some of SP500 funds last year and bought some dividend/value funds - which did far better than SP500. This year, SP500 has done better than dividend/value funds. Investor are backing SP500 fund with tech sector driving growth. Once the recession kicks in later this year, I think you’ll see the situation reverse and it will look like 2022 again.