Stock Pickers - Jason Zweig

youbet said:
All this broad-brushed blasting of managed funds....... Yet some, like Vanguard Wellesley and Wellington, for example, have served their customers well for many years.
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Looking at Vanguard site, looks to me like they're about matching their index benchmarks.
 
gerntz said:
Looking at Vanguard site, looks to me like they're about matching their index benchmarks.
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There was a recent thread about Vanguard claiming their managed funds outperform their index funds.
 
youbet said:
We're talking about managed funds, including blended funds. Of the few actively managed funds I own, the equity/fixed blended funds like Wellesley are the most useful. Especially in the portfolios of not-investment-savvy relatives.
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Yes. There is quite an interesting slide deck here: https://am.jpmorgan.com/blob-gim/1383280028969/83456/jp-littlebook.pdf Page 64 illustrates how well a 50/50 range portfolios have done over the last ten years. & yes on non-savvy. Target date funds too.

youbet said:
Wow. I thought you were going to say your were 100% total world market, cap weighted, a true indexer. Instead, here you are a real speculator shifting away from the total world index towards country and market cap slants. Many of us don't have the skills and know how to slice and dice to "pick-em" the way you do OldShooter!

Anyway, glad to hear you're not a true, 100% passive indexer but rather somewhere along the line stretching between active and passive.
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Well, I'll ignore the apparent sarcasm but observe that I have read a number of articles that argue that index funds are not passive because (gasp!) they buy and sell stocks. I looked at DFQTX, which doesn't even claim to be an index fund. They hold about 2600 stocks and havve an annual turnover of 4%. I'd count that as "passive."

Incidentally, we are all guilty of conflating "indexing" with "passive" investing. They really are not quite the same, as the DFA funds illustrate. None claim to be index funds but all the ones I have looked for are definitely passive, buying a statistically large number of stocks and holding them with very low turnover. Depending on the fund, they have various degrees of tilt. You can certainly accuse them of being "active" if you like but don't see it that way and I don't think they do either.

Boho said:
The scorecard for June 2015 says "Out of the 682 domestic equity funds that were in the top quartile as of March 2013, come the end of March 2015, only 5.28% had managed to stay in that top quartile. Further, 3.95% of the large-cap funds, 5.26% of the mid-cap funds, and 4.67% of the small-cap funds remained in the top quartile." ...
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Yes. Those reports come out every six months and they are always pretty much the same. Percentages vary a bit, but always lead to the same conclusion.

Boho said:
It doesn't address beating or failing to beat the S&P (from the part I read) if you choose those funds. I don't have a statistics background but my interpretation is that if you're choosing a managed fund, you should consider the return from two years prior. Probably more so one year prior, which I don't think they mention. To me, it's another one of those vaguely discouraging things. I'm not sure what to make of it.
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I think you're not quite understanding the report. None of the fund categories are being compared to the S&P 500. Each category (large cap, small cap, EAFE international, etc.) is being compared to a benchmark that matches its advertised style. It wouldn't make sense to compare an EAFE international fund to the S&P, for example. Nor would it make sense to compare a large cap fund to a small cap benchmark. The fund type are fairly standardized across the industry so, for example, if you were to look at a Morningstar report on a small cap fund their graph would also show average performance of all small cap funds as Morningstar's chosen benchmark. The SPIVA benchmarks are not an average of funds, though, they are pure performance of the category with no fees deducted.

(Using an average of other funds to evaluate a fund, which is basically Morningstars "star" system tends to make funds look better than they are. The real evaluation criterion should be a passive fund or an average of passive funds with the same style.)

Boho said:
The paper also says "there are superior managers who enhance expected returns" and "only about 2.3% have [alpha] greater than 2.50% per year (about 0.21% per month) – before expenses." So, if any of those managers have expenses of 1%, you'd be ahead of the S&P with them, right?
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Well, no. For the reasons mentioned above. Those managers are being identified as superior for generating alpha above a benchmark appropriate to their style.

I think the main thing you are struggling with is the idea that past manager performance does not predict the future. It seems so crazy to ignore past manager performance and it took me a long time to finally accept this. Fama and French are very smart guys doing very careful work and if they conclude that there is no way to identify a superior manager ahead of time, then (finally) I have accepted that. The S&P Manager Persistence scorecards reach the same conclusion. So both the analytical and the statistical paths lead to exactly the same place. I think we ignore it at our peril.
 
OldShooter said:
It seems so crazy to ignore past manager performance and it took me a long time to finally accept this.
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I haven't accepted it yet. I don't understand what the stats say on this other than there's less correlation between past performance and future results than some people would think. I still believe there's a positive correlation. There needs to be more clarity when presenting the numbers for me to be convinced otherwise. The numbers as presented aren't enough and statements like you're making aren't enough. I need something from an authoritative source that points to the numbers and says they mean you get no advantage from considering performance from the past year or 6 months or quarter. I think you should have gone with your initial instinct. The stats are misleading as presented.
 
Boho said:
I haven't accepted it yet. ... There needs to be more clarity when presenting the numbers for me to be convinced otherwise. ...
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I think a better approach to determine if something is true or not is to approach it with skepticism. You are doing the opposite, you believe something to be true (w/o data), and say you won't believe it's not true until you see data to disprove it.

If I look at the world that way, I believe in Unicorns and Yetti, and I will continue to believe in Unicorns and Yetti until you prove they don't exist.

So instead, look for the evidence that past performance is a strong enough indicator of future performance to provide some significant alpha. And until you have the data, don't accept the premise as anything other than a thought to be proven/disproven.

-ERD50
 
ERD50 said:
I think a better approach to determine if something is true or not is to approach it with skepticism. You are doing the opposite, you believe something to be true (w/o data), and say you won't believe it's not true until you see data to disprove it.

...


-ERD50
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Boho,

In addition to what ERD50 says about seeing data, I'd say pursue personal experience.

Another way to look at things, from the outside, something might seem easy until you really try it. On TV, hitting a major league fastball looks easy, but if you went in the batter's box and faced a real big league pitcher, not so easy.

You can do the same. Instead of deciding by studies (because there's always be attempts to disprove a previous study), why not try for yourself? The contest is one way as a simulation. Another would be, for yourself allocate some real money that you feel comfortable with, and say, for the next 5 years, see how well you perform by trying to use "The Best" manager(s) you can find and compare that with a control (a lazy portfolio, for instance). That way you can draw a real life, personal conclusion.

Sounds like that was the path Oldshooter took over the past 25 years. Trial and evaluate.

In my younger days, I used to think, I bet I could run a marathon if I put my mind to that. But at the most, went about 5 miles and realized, "No way!". Well, maybe if someone held a gun to my head, but other than that, "No way!".
 
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Boho said:
... I need something from an authoritative source ...
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Well, er ... I don't know that I can come up with a source that's more authoritative than a Nobel prize winner. :( or than the Standard & Poor's organization. :(

Take a look at this guy: https://en.wikipedia.org/wiki/Charles_D._Ellis and see what you think. If you like him, read his book Winning the Loser's Game. His thesis is that there are so many brilliant money managers, each with vast resources and virtually unlimited information, that they cancel each other out. The result is the random and unpredictable results we see.

Also, let me try another way; a way that requires no authorities but rather relies on simple logic:

Let's hypothesize that there is a manager out there who is differentiated from the 10,000 monkeys flipping coins by actually having some persistent skills. Fama and French freely admit that such animals may exist; they have just not been able to identify them.

So why would such an person be putting on a suit every morning and slaving away for a company that is selling his skills for maybe 75 basis points? Logic argues that he wouldn't be. Right out of the box, he may have taken money from a few accredited investors and used it to build a small fortune for himself and for them. Once he hit his threshold, he would have gone on his own and used his skills to make himself as rich as he cared to be. He would do this from a beach on a pleasant tropical island. Visualize him lying there being hand-fed peeled grapes and drinking from a glass garnished with an orchid or a little paper umbrella. Logic says that you will never find these animals working long-term for retail mutual funds. Hence, if they exist at all, they will not be accessible to us. We are stuck with the monkeys. Or with passive investing.

(I know, I know: It could be a him or a her. I am just too lazy to craft asexual rhetoric.)

easysurfer said:
... why not try for yourself?... allocate some real money that you feel comfortable with, and say, for the next 5 years, see how well you perform by trying to use "The Best" manager(s) you can find and compare that with a control (a lazy portfolio, for instance). That way you can draw a real life, personal conclusion.

Sounds like that was the path Oldshooter took over the past 25 years. Trail and evaluate. ...
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Yup. The first hot manager I chased was a guy named Kurt Lindner in Kansas City. (Kurt Lindner, 72 - Built Mutual Funds - NYTimes.com) This was probably in the late '70s. None of my chasing ever found persistence. (Amusing factoid: Back in those years I looked at Fidelity Magellan but decided not to invest because at $800M I thought it was too big to be successful. Bad roll of the dice that time!)

Note that you cannot simply pick some funds today and go back to check results compared to five years ago. This is due to "survivorship bias." Too complicated to get into in detail here but the punch line is that the majority of funds you might have chosen 5 years ago have gone out of business or merged due to poor performance. (https://www.ifa.com/articles/survivorship_bias_things_are_not_as_good_as_they_look/)

Another interesting facet is the emergence of fund "incubation." (Incubated Fund) Clever guys, these hucksters. With an incubated fund it is easy to see that a successful history is meaningless.
 
Boho said:
There was a recent thread about Vanguard claiming their managed funds outperform their index funds.
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W/o naming the funds & time frames & the data source, anyone can say anything.
 
I think it's short sighted to buy into the idea that index funds are always better than stock picking. Sure, if you do no research, try and time the market, etc. that may be true. All I can say is that if I use my personal portfolio for the last 10 years (That's when I started picking stocks) as a real life example, I've beat the S&P 6/10. That doesn't seem like much, but when I did beat it, I beat it by a lot and when I didn't it was very close. Average return of my self managed is 3.5% higher than that of the S&P. A theoretical $100 in the S&P would have given me roughly $260 today vs $340 with my picks.
 
brokrken said:
I think it's short sighted to buy into the idea that index funds are always better than stock picking. Sure, if you do no research, try and time the market, etc. that may be true. All I can say is that if I use my personal portfolio for the last 10 years (That's when I started picking stocks) as a real life example, I've beat the S&P 6/10. That doesn't seem like much, but when I did beat it, I beat it by a lot and when I didn't it was very close. Average return of my self managed is 3.5% higher than that of the S&P. A theoretical $100 in the S&P would have given me roughly $260 today vs $340 with my picks.
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Well, it would be silly for anyone to say that no one can beat the market by stock picking.

Not to be dismissive of your accomplishments, but realistically, if you had 1,000 people throw darts to pick stocks, some of them will probably beat the market 6/10 and $340/$260. We don't know, and I don't think you can know, if your performance is skill or just within an expected distribution of outcomes.

More importantly, it does not seem that we can pick fund managers who consistently beat the market. Vanguard's Wellesley and Wellington seem to be doing it, but I can't convince myself that that won't end the minute I buy them! ;)

-ERD50
 
brokrken said:
I think it's short sighted to buy into the idea that index funds are always better than stock picking. Sure, if you do no research, try and time the market, etc. that may be true. All I can say is that if I use my personal portfolio for the last 10 years (That's when I started picking stocks) as a real life example, I've beat the S&P 6/10. That doesn't seem like much, but when I did beat it, I beat it by a lot and when I didn't it was very close. Average return of my self managed is 3.5% higher than that of the S&P. A theoretical $100 in the S&P would have given me roughly $260 today vs $340 with my picks.
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I don't doubt your results, but it is highly unlikely that the S&P is a good measuring stick to use. Better would be the Russell 3000 total return and the ACWI total return or some other index that is appropriate to the sectors that you are trading in.

Note also: Total Return. One flaw in many arguments I have seen is that the S&P nominal return, which does not consider dividends, is used.Depending on the period you use, this a return rate that is two to four percent below the total return. Most of the easy-to-find data on the 'net is nominal return. You have to dig a bit to make sure you are getting total return data.

I don't know of anyone who says that index funds are always better than stock picking. William Sharpe explained the arithmetic in his 1991 paper (https://web.stanford.edu/~wfsharpe/art/active/active.htm). He shows why the average of all stock picker results, as delivered to customers, must underperform the market by the amount of their costs. Key to this, though, is that the "market" that is averaged must be the universe of stocks that the stock pickers are buying. IOW, taking the S&P as a measuring stick for emerging market stock pickers will not yield useful results.

Note that "costs" includes not only fees but all the costs of trading; bid-ask spreads, moving the market when getting in or out of a stock, soft dollars, etc.

That said, the S&P SPIVA results show that using a narrower "market" suited to the stock pickers being measured basically delivers the theoretical result or even a little less.

In both cases though, there will be cases where some stock pickers outperform their benchmarks. The wrench in the gears, though, is that no one has figured out how to identify these outperformers ahead of time. This is consistent with their results being due to luck, not skill.
 
Agree, I could just be lucky. A few points. The vast majority of the stocks I own are in the S&P 500 and the small amount that isn't hasn't contributed in any meaningful way to any over/under performance. So, this, along with the fact that I consider my alternative investment to be an S&P 500 fund is why I chose that as a benchmark. I also took total return (I think), as I used the balance of my S&P 500 fund to calculate the return, which includes dividends.


I honestly the key has been that I have taken a long term view. I have actually only sold one stock during that time, but I have bought many, and grown positions during downturns. I have good, profitable companies that I have watched go through ups and downs and I think that has rewarded me in many cases.


Fully agree this may change and my "luck" may run out, which is why I track it closely. I told myself if I ever consistently don't be my benchmark then I'll sell it all and by the fund. TBD...
 
brokrken said:
Agree, I could just be lucky. A few points. The vast majority of the stocks I own are in the S&P 500 and the small amount that isn't hasn't contributed in any meaningful way to any over/under performance. So, this, along with the fact that I consider my alternative investment to be an S&P 500 fund is why I chose that as a benchmark. I also took total return (I think), as I used the balance of my S&P 500 fund to calculate the return, which includes dividends.


I honestly the key has been that I have taken a long term view. I have actually only sold one stock during that time, but I have bought many, and grown positions during downturns. I have good, profitable companies that I have watched go through ups and downs and I think that has rewarded me in many cases.


Fully agree this may change and my "luck" may run out, which is why I track it closely. I told myself if I ever consistently don't be my benchmark then I'll sell it all and by the fund. TBD...
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Sounds reasonable, but it begs the question - wouldn't quite a few fund managers be able to replicate this? Yet, very, very few of them do.

-ERD50
 
Again, no clue why they don't. I can only speak about my results.
 
brokrken said:
Sure, if you do no research, try and time the market, etc. that may be true. All I can say is that if I use my personal portfolio for the last 10 years (That's when I started picking stocks) as a real life example, I've beat the S&P 6/10. That doesn't seem like much, but when I did beat it, I beat it by a lot and when I didn't it was very close. Average return of my self managed is 3.5% higher than that of the S&P. A theoretical $100 in the S&P would have given me roughly $260 today vs $340 with my picks.
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That sounds like work. You should retire.
 
gerntz, haha, I wish. Got some years left before I get there.
 
ERD50 said:
... I think they don't, because they can't
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In Winning the Loser's Game Charles Ellis makes this argument: The professional stock pickers are all brilliant and all equipped with vast resources and information. As a result they cancel each other out, leaving us with the random and unpredictable results that we see.

I'm not sure I buy it, but it's an interesting argument. And he's a guy with pretty good credentials.

For myself, I really don't need to know how the watch works. I just need to know what time it is. The S&P SPIVA and Manager Persistence scorecards tell me that.
 
I'll come back often and update the group on my progress. YTD 2017, my picks +10.3%, S&P +6.4% as of close yesterday
 
ERD50 said:
Well, they are clearly very motivated.

I think they don't, because they can't.

-ERD50
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Three common reasons why they can't:

  • Funds are too big - harder to outperform managing billions
  • Brokrken works for free, fund managers don't
  • Fund managers that perform poorly a few quarters often face very strong pressure, so they protect the short term vs. long term
To name a few. Investing is a game where the little guy actually can have an edge. Still doesn't change the fact that most squander it, and there is so much noise it is hard to distinguish skill from luck. But the odds are actually a bit bitter being small, than being big. If one brings the skill ..
 
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OldShooter said:
Edit: This article (New Fama-French Study Puts Managers Under Microscope | ETF.com) includes a link to the paper that Ken French mentions, Luck Versus Skill in the Cross Section of Mutual Fund Returns.
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I read this paper (the actual paper, not the summary) a long time ago. It's a good paper and interesting read. It also explains why simple comparisons such as benchmarking ones portfolio against the S&P 500 is not the right thing to do.

As I recall, they did have evidence for a small amount of true manager (stock picking) skill. But it was mostly/entirely eaten up by the extra expense ratio. If you don't count that, it was still a tiny fraction of a percent of managers that outperform beyond chance. You have to pick these out the many managers that are outperforming by luck (odds so imbalanced that it would be hard to do).

However, one point I'd like to make with the Fama & French paper is that their model for benchmarking manager performance / stock picking skill is the 3 factor model with size and value (maybe it was the 4 factor adding momentum -- I don't remember). As an index investor, especially at vanguard, it's been hard historically to get exposure to size and value. So if you were investing 20 years ago, as an index investor, some strategies were simply not available to you. On the other hand, an individual stock picker could have pursued say a deep value approach, and even if he/she picked stocks at random (within the value subset), could have outperformed an indexer who didn't have access to a value fund (value stocks generally have higher expected returns).

Even today there are no index funds (or almost none) that track the momentum factor. And this factor has been known for at least 20 years now. An individual stock picker can pursue this approach and potentially do better without any skill.

It's easier now with the proliferation of ETFs and I'm sure some people have access to DFA funds, but if you look at bogleheads, there's a huge number of threads/posts about which index fund has the best "value" loading or "size" loading.
 
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Thanks for the back-up Totoro. My whole point in posting here was merely to say it can be done, I have proof over a 10 year period that it can be done, and I'm no genius.


By the way, I see you live in Utrecht. Great city. I work for Dutch company, so I'm over that way quite often.
 
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