The Big Investment Lie (excerpt)

[cute fuzzy bunny]

I could be wrong but seems to the performance tracking was only for a relatively short period of time a decade or so and included only a single fund.

IIRC, the problem was that with the exception of lynch and millers magellan and legg mason value, no funds had beaten the S&P for longer than ten years. Including funds that didnt make it would seem fruitless.

What about Peter Lynch or Bill Miller before Magellan or Leg Mason, anybody seen a study on their lifetime performance?

I hate to be flip, but if it was any good I doubt we'd be hearing anything BUT how long they'd beaten the market and by how much.

As we know the law of big numbers pretty much puts a cap on open ended mutual funds significantly outperforming the market for long periods of time.

And therein lay the problem. It seems that predicting which funds/sectors/styles/combination of holdings will do well over the next ten years seems implausible. If someone were able to do this, the money would certainly be flowing in their direction. We can see it looking back with 20/20 hindsight. The hard part is seeing it looking forward, knowing when to get in, and knowing when to get out.

The question is do these results prove that stock picking is a fool errand as the efficient market theory people contend,or do they just prove that open managed mutual funds aren't a good investment vehicle?

Honestly...I think both. I think some people that are very well disciplined can pick up bargains and hold them until they're fully valued and then part company with them, picking up others. I think its really hard to do, I think that many situations are so complex that even the best vetting can fail more often than one would like, and while you'll make money I dont know that after 25 years you'd be on the upside.

Buffet's performance may not be repeatable. He bought big long haul growth stocks at good prices and then kept them until they stopped being the top worldwide brand of choice. Once he'd amassed a considerable fortune he could buy atm-like businesses that reliably produced cash. Once he got that far, he could buy and fix businesses with favorable outlooks but some reparable problem.

If this was really doable, where are the thousands of fund managers who, like Lynch and Miller, would be crowing about their results in beating the markets for 10+ years? We should have at LEAST that many.

Instead, we have a bunch of schmucks who want to tell us about the one or two portfolios out of twenty that didnt hit bottom, with a start date of the beginning of the current bull run.

 

[haha]

Only thing I can't understand is why we spend so much energy proving that mediocrity is best after all. What is the hook?

Ha

 

[unclemick]

Only thing I can't understand is why we spend so much energy proving that mediocrity is best after all. What is the hook?

Ha

The hook is that even a schmuck such as myself can ER via boring as paint dollar cost averaging 500index, time in the market and good old cheap bastardhood(read frugal) - the horse I rode in on - in spite of forty years of 'brilliant legend in my own mind stock picking'.

Great entertainment - lots of thrill of victory/agony of defeat moments picking stocks but in the end - time in the market(sold and ate the duplex proceeds early in ER) ho hum balanced index.

heh heh heh - Then again Inherit The Wind is on the TCM channel right now - so if you like old time religion(opening theme song) the Norwegian widow says psssst Wellesley or the old timey widow and orphans - utes, telephone, oil, banks, food, drugs and REITs type dividend stocks.

 

[Nords]

Buffet's performance may not be repeatable.

Or maybe it can be. There are "private investors" like Ruane and the Fishers who do quite well on their own but who don't want to contend with bloat. And there are at least four newbs at Berkshire Hathaway who are hoping that Buffett can train them to carry on his tradition, to say nothing of the thousands of [-]blissfully ignorant[/-] ever-hopeful stockholders.

Let's not forget that the whole thing is one heckuva lot of work for people who aren't hardwired to get excited about reading the entire Moody's & S&P stock guides plus a half-dozen daily newspapers and then start making phone calls. Buffett's joke is "start with the stocks beginning with the letter 'A'..."

If this was really doable, where are the thousands of fund managers who, like Lynch and Miller, would be crowing about their results in beating the markets for 10+ years? We should have at LEAST that many.
Instead, we have a bunch of schmucks who want to tell us about the one or two portfolios out of twenty that didnt hit bottom, with a start date of the beginning of the current bull run.

To be fair, there's also guys like George Soros, Eddie Lampert, and the Danahers. They've all hit rocky patches over the years, just like Buffett was an idiot in 1999 for not buying tech.

 

[TickTock]

Yup read 4 Pillar (actually the library had it on audio tape only so I didn't get to see all the charts.) Speigel's Stocks for the Long Run, Random Walk down Wall Street, Bogle on Mutual Funds and bunch of others

I'm on the road right now, so can't go to the bookshelf and check, but I'm pretty sure that Bernstein, Bogle, and Malkiel address the issue of performance not repeating by any more than random chance would predict.

It seems to me that something like WSJ long running dart portfolio vs the pros. (In which the Pros beat the darts by a small but measurable amount) are a better test of my contention that stock picking is skill and not equally distributed.

Still doesn't mean that using their picks is better - are there results better than the dart throws after there reserach expenses, and more importantly, are there results better than the dart throws after the expenses that they'd charge you?

It's true that larger funds are somewhat handcuffed in what they can invest in, and impact costs are significant. Still, the guys that manage those funds are megastars in the investment world, making big bucks and having time, money, and staff to devote to the task. If they can't consistently beat the indexes, how can you and I reasonably expect to do so?

The biggest reason I can think of is that we can follow smaller stocks and don't have the impact costs. Peter Lynch makes this point in at least one of his books.

Any individual investor's results are not statistically significant - were they lucky, or good? I'm not aware of any good academic studies on this area.


In the final analysis, I have money to invest, and have to do something with it, even if it's just stuffing it in the mattress. I see no evidence to support the idea that I, as an individual with limited time to research stocks, have a reasonable expectation of beating those who do have the time/money/tools. I see solid evidence that indexing is a strategy that over the long term will put me in the top 25% of returns. So I go with low-cost, buy-and-hold, index, rebalancing.

I won't say that an individual can't beat the market; that's obviously false. I won't say that an individual can't beat the market through skill rather than luck, the evidence isn't that strong. I will say that I think the strategy most likely to provide superior performance is indexing.

 

[TickTock]

Only thing I can't understand is why we spend so much energy proving that mediocrity is best after all.

Well, what is mediocrity? If, over the long haul, indexing gets you into the top 25% of invetment results, isn't that superior?

Note that here I'm talking about comparing indexing against relevant benchmark - it's not correct to judge a small-value investor against a large-blend investor.

Also, correct market-timing and security selection provides a huge advantage over indexing; I've just not seen any evidence to indicate that I have a reasonable expectation of doing so.

 

[cute fuzzy bunny]

Or maybe it can be.

Sure. But can you find the guy that'll do it in advance and can you participate in the effort? I think thats the crux of it.

Tick-Tock...actually what Bernstein found was that the number of managers who "beat the market" was substantially below that of random average. I think he practically said 'active management is harmful'.

I summarized it right after I read it.

http://www.early-retirement.org/forums/f28/book-report-four-pillars-investing-14508.html

 

[TickTock]

Thanks, cute fuzzy bunny!

I didn't want to make too strong a claim while away from the sources to cite.

*****************************

Okay, here's a real-world example.

An employee at my corporation got it into his head that a certain stock was about to explode upward, for various reasons.

So, he bought as much stock as he could with his savings, mortaged his house to the hilt, ran up all the credit cards he could get to the max, borrowed every penny he could get, and bought stock with all the money.

And, guess what















He was right!

The stock went through the roof, and he sold when it was through the roof, and he RETIRED!!!

Now, he has a bunch of the younger folk at the plant thinking this is THE WAY to make a lot of money and retire early.

So, was he lucky, or good?

Is it something you'd want to bet your future on? If the stock had merely stayed flat, he'd have been financially sunk trying to make payments on the money that he'd borrowed.

Oh, did I mention that he has a wife and kids? It's one thing to make a bet like that when it's only your own future at stake, but another when other folks are depending on you.

 

[ats5g]

Well, if anyone is interested, here are some articles on Mutual Fund Persistence.

I think the odds of me [or most anyone else] finding the next Buffet is pretty slim. I think I'll take Buffet's advice and invest in index funds.

- Alec

 

[clifp]

In the final analysis, I have money to invest, and have to do something with it, even if it's just stuffing it in the mattress. I see no evidence to support the idea that I, as an individual with limited time to research stocks, have a reasonable expectation of beating those who do have the time/money/tools. I see solid evidence that indexing is a strategy that over the long term will put me in the top 25% of returns. So I go with low-cost, buy-and-hold, index, rebalancing.

I won't say that an individual can't beat the market; that's obviously false. I won't say that an individual can't beat the market through skill rather than luck, the evidence isn't that strong. I will say that I think the strategy most likely to provide superior performance is indexing.

My when you put it in this reasonable fashion, it is hard to argue with. Damn what fun is that .

Ok back to looking for other sacred cows to attack. How about retiring early is evil and immoral, that should get the board exicted.

 

[twaddle]

no funds had beaten the S&P for longer than ten years.

I never understood this sort of claim. Is the claim that no fund beat the market every year for 10 years straight, or that no fund has beaten the market in total return after 10 years?

My personal experience is that I've owned Vanguard's Health Care fund for 20+ years now, and the total return of that fund has beaten the market over that 20 year period.

I would imagine that any tech fund that held a large concentration of DELL, MSFT, and INTC also beat the market over a 20 year period.

If you capture the whole market, you're basically capturing US GDP growth + some speculative return (which should go away over time). It's always seemed obvious to me that some sectors grow faster than the overall economy, and if you capture that growth, you'll beat the market.

Random examples in this chart:

 

[cute fuzzy bunny]

Yahbut while sector (and individual stock) growth is obvious in the rear view mirror, its not going forward.

If it were, what would you be buying that'd be so obviously good right now thats a cant miss market beater for the next decade? And if it were so obviously good, why wouldnt everyone already have bought it?

Clearly by taking stakes in higher return, higher risk sectors and holding them for decades, one could do well.

How do ya think that health care fund would have worked out if Hillary's first health care endeavor had matured and come to fruition? That might have stunted a lot of profit dollars. I actually had most of my 401k in vanguard health care for some time, but pulled it out a few years ago. I cant see that gravy train going on for many more years at these rising profit levels. Who could afford to pay?

As far as returns, the benchmark is to beat it every year. Thats persistency. I had a triple digit return one year in the late 90's. Over the past 15 years I've absolutely killed "the market". In fact, except for 2000, every single year. Does it count if over time you're "beating" if you only did it once (albeit spectacularly) and never do it again?

Ya wanna send me some money to invest for you? I'll charge less than Bill Miller does!

So we're still in the same conundrum. You can look back and see what was better. But risk and probability adjusted, its not likely that you'd do so going forward.

Alec, didnt you post some stuff about individual stock picking once, what ones observed odds were of "hitting a big one"? IIRC it was something like one in six.

 

[twaddle]

As far as returns, the benchmark is to beat it every year.

That seems like a bogus benchmark. Not even the much vaunted Buffett, who is used as an "outlier" example, consistently beats the market.

 

[lswswein]

That seems like a bogus benchmark. Not even the much vaunted Buffett, who is used as an "outlier" example, consistently beats the market.

Buffett says rolling periods of say 5 or 10 yrs. For a lot of funds that is really hard too. There aren't many that beat the benchmark over a rolling 5yr period and then managed to hang on with the Index after the big influx of performance chasing money.

 

[FinanceDude]

That seems like a bogus benchmark. Not even the much vaunted Buffett, who is used as an "outlier" example, consistently beats the market.

So, this info is a lie??

http://www.berkshirehathaway.com/letters/2005ltr.pdf

Outlier or not, those numbers don't lie, and you CAN invest in his companies, through the "A" or "B" share class, so he IS a manager you can buy into, not like some high entry hedge fund guy.........

 

[cute fuzzy bunny]

Okay then. Whats the market beater investment or product we should be buying right now that'll produce better results than the market over the next xx years? Who is the fund manager or investment manager or financial planner that will give us all the best returns?

We just had a period when active management should have really shined...from 1999-current, a smart money manager should have been able to jump out in '00 when prices were outrageous, then grab bargains in 02/03 when things were skimming bottom, got into home builders and finance companies in 02 before the building boom fired up, and out again before this years collapse.

Certainly the data was there. There was plenty of speculation and opinion.

So why havent a bunch of funds really stand out in that period that didnt totally reek for the 1994-2000 period? How come everything that was hot from 94-00 stank over the last 7 years? Out of the mutual fund universe, shouldnt at least 20, 30, 100 funds be around that had market beating returns for at least 10-12 of the last 14 years?

I mean, come on! The S&P 500 has a bunch of "bad" stocks in it that on their own, nobody would choose as a major holding. Being able to drop those "bad" stocks and just keeping the "good" ones should certainly assure success.

Ah, thats right...Bernstein showed that a lot of the "good" returns came from the "bad" stocks, principally because it was hard to tell which stocks would be "good" in advance, and because the "good" stocks didnt stay "good" for very long.

 

[twaddle]

So, this info is a lie??

http://www.berkshirehathaway.com/letters/2005ltr.pdf

Outlier or not, those numbers don't lie, and you CAN invest in his companies, through the "A" or "B" share class, so he IS a manager you can buy into, not like some high entry hedge fund guy.........

Is what a lie? That shows that Buffett doesn't beat the market every year, which is the benchmark CFB says he has to beat.

Even Fama & French say that you can consistently beat the market over time, but they want you to believe it's because of a higher risk premium.....

 

[twaddle]

Whats the market beater investment or product we should be buying right now that'll produce better results than the market over the next xx years?

Didn't you say your wife was in the hospice industry? Take an industry that is currently losing money because they underestimated risk (and will obviously fix). Add a dash of unstoppable demographic trends. I think we have a winner!

 

[FinanceDude]

Is what a lie? That shows that Buffett doesn't beat the market every year, which is the benchmark CFB says he has to beat.

I get it......you are saying that index funds are superior because they NEVER beat the market, because they are the market..........

One year returns are useless to me, I look at 3,5,10,20 years.

Hindsight is 20/20, we all look smart when we look back.

The smartest thing I did was go from 100% equities to 20% bonds in December 1999. The dumbest thing I did was not to go to 100% BONDS in December 1999, and then go to 100% equities on October 9th, 2002....................

If I had only known..........

 

[twaddle]

One year returns are useless to me, I look at 3,5,10,20 years.

I think we're agreeing. I said that the benchmark was bogus.

So, what's our benchmark? Risk-adjusted returns over a 20 year period?

 

[lswswein]

I think we're agreeing. I said that the benchmark was bogus.

So, what's our benchmark? Risk-adjusted returns over a 20 year period?

Try rolling periods of 5 or 10 yrs. And you have to beat the index in atleast half(more the better) the total number of rolling periods possible and also end up with a higher total value at the end. I think you might find a few in the 5yr rolling periods but the 10yr ones I don't think exist

-h
p.s: Just to make it clear,if the fund started on Jan 1994 - the 5yr rolling periods are 94-98, 95-99, 96-00, 97-01, 98-02 etc. Then you compare it with the risk adjusted Index (ie don't compare Intl with S&P 500 or SMall Value with S&P 500) for every period and then compare the total end value. Now check how many we end up with!

 

[ziggy29]

Buffett says rolling periods of say 5 or 10 yrs. For a lot of funds that is really hard too. There aren't many that beat the benchmark over a rolling 5yr period and then managed to hang on with the Index after the big influx of performance chasing money.

Buffett is looking at longer periods of time, not year-to-year. His writings clearly indicate a preference to earn a "lumpy 15%" over time than a "smooth 12%."

 

[twaddle]

Try rolling periods of 5 or 10 yrs.

It looks like BRK underperformed the market for a 5-year period if you go back just before the bounce they got in August.

10 years is probably a reasonable period to look at since it generally includes a full business cycle, but I just don't have the data. It does look like my Vanguard Health Care fund, as well as BRK, would meet the 10-year test though.

 

[cute fuzzy bunny]

Didn't you say your wife was in the hospice industry? Take an industry that is currently losing money because they underestimated risk (and will obviously fix). Add a dash of unstoppable demographic trends. I think we have a winner!

And then healthcare gets socialized, the profits disappear, and the investments are worthless.

Not seeing how this would clearly be a ten year market beater.

Honestly, not even sure that without the socialization that its a big profit generator. The hospices have been stuffing their beds to bring in more money, then people are living an unexpectedly long time. And the hospice has to pay medicare back for the overage. To offset the outflow, the hospics are yanking in more people...who will outlive their costs and end up living on the hospices dime.

Sure sounds like a winner... :

It looks like BRK underperformed the market for a 5-year period if you go back just before the bounce they got in August.

10 years is probably a reasonable period to look at since it generally includes a full business cycle, but I just don't have the data. It does look like my Vanguard Health Care fund, as well as BRK, would meet the 10-year test though.

Great. Now what happens if Warren has a heart attack and dies next year, and the new president implements socialized medicine.

 

[ziggy29]

It looks like BRK underperformed the market for a 5-year period if you go back just before the bounce they got in August.

BRK also underperformed badly in 1998 and 1999. I remember a lot of frustrated people (who probably shouldn't have owned Berkshire) asking aloud why Buffett wasn't buying tech, and why he wasn't buying (mostly high-P/E) stocks with all that cash "weighing him down". As the market reached bubblicious proportions, Berkshire was falling. I remember loading up on the B shares at around 1400 a pop near the bottom.

Soon the bubble popped and people realized why Buffett wasn't buying the high-flying tech or the overvalued stocks of other companies which, no matter how good the companies, were overvalued as stocks.