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[bcinvest]

Quote:

Originally Posted by Gone4Good What's the difference between the performance of a mutual fund and the performance of the manager? Are you suggesting that academics are so stupid that in 40 years of research they've never controlled for things like manager migration? Just about anything you can imagine, has been studied. Noble Prizes are there for the taking if you want to put a study together that will overthrow Fama's work. This conversation reminds me of the "God of the gaps" argument with active traders looking to ever shrinking ground to stand on as evidence mounts around them that what they claim to be able to do can't be verified by any known science.

That has already been done:

SSRN-Finiteness of Variance is Irrelevant in the Practice of Quantitative Finance by Nassim Taleb

Out-of-Equilibrium Economics and Agent-Based Modeling - Microsoft Academic Search

SSRN-The Virtues and Vices of Equilibrium and the Future of Financial Economics by J. Farmer, John Geanakoplos

Fama's science is junk and it has been proven so repeatedly in academia and more importantly in practice. Take a look at Long Term Capital Management and how using Nobel Prize winning economics blew up in practice.

[Onward]

You don't need the academic studies to convince you that stock-picking is a sub-optimal strategy. Just realize that you're playing a zero-sum game against people who have much better tools and information than you. Unless you are a genuine genius, your competitors are also smarter than you. How can you look at that situation and consider it good odds? Any size advantage you have has a minimal effect in the face of those overwhelming odds against you as a stock-picker.

[bcinvest]

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Originally Posted by Onward You don't need the academic studies to convince you that stock-picking is a sub-optimal strategy. Just realize that you're playing a zero-sum game against people who have much better tools and information than you. Unless you are a genuine genius, your competitors are also smarter than you. How can you look at that situation and consider it good odds? Any size advantage you have has a minimal effect in the face of those overwhelming odds against you as a stock-picker.

Sub optimal strategy based on what, opinion? So is NFL football, you still have winners and losers. That it is a zero sum game is irrelevant when looking at a small subset of investors.

I consider it good odds because of having beat the market in 10 of the last 11 years by on average more than 13 percentage points a year and I personally know of another 8 to 10 investors who invest the same way and have similar records.

You have been conditioned by the finance machine to believe the odds are overwhelming. I would guess that investor performance has fat tails just as markets themselves do.

[FinanceDude]

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Originally Posted by Gone4Good Anecdotes are meaningless.

Whatever...you are stuck in your opinion and refuse to see any others............it's your right........

[REWahoo]

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Originally Posted by bcinvest ... having beat the market in 10 of the last 11 years...

And you've mentioned this in 10 of your last 11 posts - or so it seems.

[bcinvest]

I know numbers is hard but counting shouldn't be that tough. Are you offended at the idea that some investors can beat the market? Why would you care how often I mentioned it? It seems to strike a nerve with you when I do.

[REWahoo]

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Originally Posted by bcinvest Why would you care how often I mentioned it? It seems to strike a nerve with you when I do.

Any spammish sales pitch on this forum strikes a nerve with me.

[bcinvest]

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Originally Posted by REWahoo Any spammish sales pitch on this forum strikes a nerve with me.

If you construe a discussion on finance theory as a sales pitch you have a very active imagination.

[Nords]

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Originally Posted by bcinvest If you construe a discussion on finance theory as a sales pitch you have a very active imagination.

Seems like more of a lecture than a discussion from over here.

The irony of your enervation is that there are actually posters on this board who agree with you. We just don't feel obligated to defend the position so strongly or to use such provocative & pejorative language.

Getting back to world-class stock-pickers, here's a guy who thought he was going to retire but just can't turn it off. His record is listed starting at the bottom of page 17 of the attached PDF from his boss:
http://www.berkshirehathaway.com/letters/2004ltr.pdf

The nice thing about Simpson's gig at GEICO is that he didn't have to market his skills, he didn't have to contend with fund bloat, he rarely had shareholders clamoring at him to pull their money out of his "fund", and he got to work out of his home office.

[Bestwifeever]

The irony of bleating that one has beat the market 10 of 11 years is that there are people on this board who have done better than that (you know who you are ) yet manage to keep quiet about it. Perhaps because they have nothing to gain by doing so.

[GregLee]

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Originally Posted by Bestwifeever The irony of bleating that one has beat the market 10 of 11 years is that there are people on this board who have done better than that (you know who you are ) yet manage to keep quiet about it. Perhaps because they have nothing to gain by doing so.

"Doing so" in that last sentence is a grammatically interesting construction. Its antecedent predicate appears to be "bleating that they have done better than beating the market 10 of 11 years". (I'm not implying there is anything wrong with it.)

[HornedToad10]

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Originally Posted by bcinvest I consider it good odds because of having beat the market in 10 of the last 11 years by on average more than 13 percentage points a year and I personally know of another 8 to 10 investors who invest the same way and have similar records. You have been conditioned by the finance machine to believe the odds are overwhelming. I would guess that investor performance has fat tails just as markets themselves do.

You know, I'm pretty sure I've 'beaten' the 'market' for the last several years also with a well diversified portfolio of index funds. It's amazing how easy it is to 'beat the market' when you invest in riskier asset classes than just the S&P 500 and benefit from the increased return.

That's why beating the market is such a meaningless statement. The real question is can you consistently beat the index that best corresponds to the individual stocks in your portfolio. Or more precisely, if you own 30% small cap stocks, 40% international and 30% large cap, does that individual stock portfolio beat a corresponding index fund portfolio with the same allocation. Some years it probably will and some years it probably won't, but then at least it's a legitimate discussion that would mean something.

[HFWR]

This is better than Oprah...

[Alan]

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Originally Posted by HFWR This is better than Oprah...

Isn't it just? Very entertaining.

[ziggy29]

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Originally Posted by Nords Getting back to world-class stock-pickers, here's a guy who thought he was going to retire but just can't turn it off. His record is listed starting at the bottom of page 17 of the attached PDF from his boss: http://www.berkshirehathaway.com/letters/2004ltr.pdf The nice thing about Simpson's gig at GEICO is that he didn't have to market his skills, he didn't have to contend with fund bloat, he rarely had shareholders clamoring at him to pull their money out of his "fund", and he got to work out of his home office.

Speaking of Mr. Buffett, he's also repeatedly said that he could do much better if he only had a few million dollars to invest instead of tens of billions as he has with Berkshire. There just aren't enough outstanding opportunities (potential 10-baggers or better, say) to significantly beat the market when you have to deploy that much capital.

[ziggy29]

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Originally Posted by HornedToad10 You know, I'm pretty sure I've 'beaten' the 'market' for the last several years also with a well diversified portfolio of index funds. It's amazing how easy it is to 'beat the market' when you invest in riskier asset classes than just the S&P 500 and benefit from the increased return.

I destroyed the bear market in 2001 and 2002 with my asset allocation (about -8% compared to about -35% for the S&P and the Dow). But so what? There was no magic or genius to it, just wide exposure to a lot of different assets at a time when many "alternative" equity asset classes (i.e. gold stocks, REITs, small cap value, emerging markets) were correlating little -- or even negatively -- with large cap U.S. stocks.

Didn't help in the crash of 2008-09, though - everything except cash and U.S. Treasuries crashed and burned in alarmingly similar ways. So much for guruhood.

[clifp]

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Originally Posted by Gone4Good What's the difference between the performance of a mutual fund and the performance of the manager? Are you suggesting that academics are so stupid that in 40 years of research they've never controlled for things like manager migration? Just about anything you can imagine, has been studied. Noble Prizes are there for the taking if you want to put a study together that will overthrow Fama's work. This conversation reminds me of the "God of the gaps" argument with active traders looking to ever shrinking ground to stand on as evidence mounts around them that what they claim to be able to do can't be verified by any known science.

I have been reading these studies for more than a decade s and I have yet to see one that follows the performance of individual managers. Care to give me a link to one.

It wasn't until I read the wiki article that found out that Magellan's outstanding performance up until mid 90s was due less to Peter Lynch and more to Magellan's first manager and current Fidelity owner Ned Johnson.
After these two superstar's it had two decent guys and than 2 below average guys who've helped to bring down to the point it is a has M* rating of one star. Magellan is unusual in the tenure of its managers is typically been a decade or more.

A far more typical situation is guy gets hired out of a top business school, spends a few years working as a junior member of a big fund, does well gets promoted to the fund manager of a very small fund. He does it exceptionally well at that fund. Gets a couple of more promotions every 3-5 years to increasingly large funds. Finally he takes over the helm of a monster fund, the size of the fund coupled with having to manage a team of people (probably very low correlation between great stock picker a great manager) causes his performance to drop. He quits out of frustration and starts a hedge fund with a couple of other guys at which point his stock picking performance drops off the public radar screen.
In fact an academic is unlikely to spot the Alpha that this guy has added to the funds performance because it for only 3-5 years stretches and is spread out over 5 different funds.

A interesting study would be to look at the lifetime trading performance of the 500 highest paid traders on Wall St. If such a study was done and it showed that the 500 best traders actually provided no Alpha, I think it would be Nobel worthy. Because it would show that Wall St firms were wasting tens of billions by overpay traders who provided no benefit. The other possibility is that Wall St. management actually is smart and when the pay Joe $10 million and Bill $1 million to trade stocks or bonds, they are actually making more profits from Joe's work than Bill's.

Sadly I lack the brains, ambition, discipline, and academic credentials to convince Wall St. firms to give me the past trading records of their highest paid traders to make such a study and get my Nobel Prize.

[clifp]

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Originally Posted by Onward Don't take the sports metaphor too far. A quarterback's performance yesterday is indicative of his performance today. A stock's past performance is not indicative of future performance.

I probably push the analogy to far but I think it is important that I get the concept across more precisely. I am not taking about measuring the absolute performance of a company or a quarterback. That is a relatively easy to do via corporate profit and quarterback ratings. I'm contending that some individuals have more significantly skill at valuing these things.

Imagine I had $330 billion (nice image and I'd even share some with you and the other board members ) Now with that money I could either buy all of Apple stock out right. If I do I am pretty confident next year that Apple will make a good profit and my guesstimate is that it will increase my wealth by $12-$20 billion. Alternatively I could buy Acer for $7 billion and 40 more companies of a similar size. My knowledge of Acer is considerably less and they operate with much thinner margins than Apple. Last year they made 500 million, next year they make break even or if China economy does well maybe they make a $1 billion. Of course they way to really make the big bucks is not to collect profits but be a trader. If I wait a couple of years and manage to sell Apple at $400 billion or Acer for $10 billion than I making huge profits. The contention among the efficient market theory folks is that nobody is skilled enough to make these profitable trades consistently and I should instead buy a piece of all companies.

A team general manager has a similar role to fund manager. Within the constrains of the salary cap he must construct a portfolio of players who will win the most games. He has a great deal of information about the past performance of all players as well as projection for future performance. All of this information is available to all other GMs and most of it is also available to fantasy sport league participants. Virtually every trade that is made in professional sports is questioned by the fans of team in both cities. Yet nobody questions that some GM are better traders than others.
Why is this? Because when a GM/coach moves from one team to another people track the performance of the coach separately from the team. So if a coach has a great record at one team, but fails to turn around the next two teams people realize that maybe the coach isn't all that great. Conversely if a Phil Jackson wins lots of games at the Bull's and then moves to the Laker's and does the same thing people recognize that Phil has real talent, including his ability to make smart trades to enhance the value of his superstars.

[Nords]

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Originally Posted by ziggy29 Speaking of Mr. Buffett, he's also repeatedly said that he could do much better if he only had a few million dollars to invest instead of tens of billions as he has with Berkshire. There just aren't enough outstanding opportunities (potential 10-baggers or better, say) to significantly beat the market when you have to deploy that much capital.

That's possibly one of the reasons that Simpson did better-- he was investing "smaller" amounts of "only $100M-$300M.