Again Low Fee Index Funds Beat Active Managed

^^^^^ Nah, it’s a game that cannot be won for more than one or two random years in a row, even for highly-paid and highly-caffeinated full-time math majors with avalanches of data and computers the size of your house. Happily, history shows that you, yes, YOU, can crush them all over any 5 year+ period by buying a few cheap index funds, leaving them alone and living your life. Over any 10 year period, your complete, utter triumph over fee and tax-ladened active investors who have made unforced errors is so dominant, it’s not even worth watching the game anymore.
 
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Markola said:
^^^^^ Nah, it’s a game that cannot be won for more than one or two random years in a row, even for highly-paid and highly-caffeinated full-time math majors with avalanches of data and computers the size of your house. Happily, history shows that you, yes, YOU, can crush them all over any 5 year+ period by buying a few cheap index funds, leaving them alone and living your life. Over any 10 year period, your complete, utter triumph over fee and tax-ladened active investors who have made unforced errors is so dominant, it’s not even worth watching the game anymore.
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Once you accept this, there's a real feeling of comfort and serenity. YMMV
 
Koolau said:
Once you accept this, there's a real feeling of comfort and serenity. YMMV
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Yes.

The hardest thing for me was to accept that stock prices and the markets in general are very, very close approximations to random processes. The distributions are not Gaussian (Remember "fat tails"?). At the market level they have a small but reliable upward bias over time.

Once you have internalized "random" then it is obvious why stock picking does not work. Who can predict random numbers? By definition, no one.

It also explains why some stock pickers do well occasionally, but almost none excel over long periods of time. It's all about luck.

Finally, it explains why buy and hold indexing works. It fully captures the steady upward bias of the market at very low cost, while averaging out the random noise.

Peace.
 
OldShooter said:
Yes.

The hardest thing for me was to accept that stock prices and the markets in general are very, very close approximations to random processes. The distributions are not Gaussian (Remember "fat tails"?). At the market level they have a small but reliable upward bias over time.

Once you have internalized "random" then it is obvious why stock picking does not work. Who can predict random numbers? By definition, no one.

It also explains why some stock pickers do well occasionally, but almost none excel over long periods of time. It's all about luck.

Finally, it explains why buy and hold indexing works. It fully captures the steady upward bias of the market at very low cost, while averaging out the random noise.

Peace.
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Yep. The trick is never being forced into equity sales when prices are low. So 100% equities (or anything close) may be problematic but YMMV.
 
People counter with, “Warren Buffett (or another investor) has certainly beat the market. I’ll just do what he (she) does.” It doesn’t work, for many reasons, including:

1) Many of Buffett’s biggest years were decades ago, when there were more inefficiencies in US stocks to be exploited by fewer people, and research was hard to come by.

2) By definition, any random distribution must have unpredictable outliers. He’s one of those lucky data points.

3) Innovative stock picking strategies work for a while until enough people use them, causing them to decline in effectiveness. How well has value investing worked recently? Buffett and Munger, famously, avoided tech in the 1990s. More recently, an underling convinced them to buy a small position in Apple, which has since become the largest holding in Berkshire’s investment portfolio today. Would people still flock to Omaha every year if Berkshire hadn’t violated its non-tech bias and bought what became the best stock on planet earth?

4) Buffett is not all that active of an investor. He’s more buy-and-hold. “The best time to sell is never.” Buffett issued a famous $1M bet to any hedge fund manager that his/her returns would lag the S&P 500 over ten years. One such master of the universe took the bet and the result was a thrashing of epic proportions.
 
OldShooter said:
Yes.

The hardest thing for me was to accept that stock prices and the markets in general are very, very close approximations to random processes. The distributions are not Gaussian (Remember "fat tails"?). At the market level they have a small but reliable upward bias over time.

Once you have internalized "random" then it is obvious why stock picking does not work. Who can predict random numbers? By definition, no one.

It also explains why some stock pickers do well occasionally, but almost none excel over long periods of time. It's all about luck.

Finally, it explains why buy and hold indexing works. It fully captures the steady upward bias of the market at very low cost, while averaging out the random noise.

Peace.
Click to expand...

The only "stock pickers" and I use this term loosely which can work better over time but only on a gross basis, but not all the time is the program trading techniques employed by some hedge funds. However when one factors in their massive fees, it does not work.

So a stock picker even on a gross basis, will not beat an index holder over time.
A program trading concept employed, which effectively is computers trading massive amounts of buys/sells "can" beat an index portfolio over time but only on a gross basis.
I saw this concept personally, but going forward as more of these engineers/tech folks program this type of trading, the slice becomes ever smaller and thus the advantages will disappear over time.
 
Markola said:
... 1) Many of Buffett’s biggest years were decades ago, when there were more inefficiencies in US stocks to be exploited by fewer people, and research was hard to come by. ...
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Yes. The two bios, "The Snowball" and "Buffett" are worth reading for any serious investor IMO. Buffett learned value investing at Ben Graham's knee, before computers and databases like CRSP became available. Information was hard to come by and market inefficiencies abounded.

The other thing, too, is that people generally don't realize is that back in the day, Buffett was a very active owner, coordinating and coaching his portfolio companies. This is a very different thing than managing a mutual fund stock portfolio as a minority owner.

Finally, I think it has been ten years since Buffett beat his benchmark. As a more hands-off manager of what has become a huge company, exceptional performance may have become impossible.

Dtail said:
The only "stock pickers" and I use this term loosely which can work better over time but only on a gross basis, but not all the time is the program trading techniques employed by some hedge funds. ...
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There's little doubt that there are winning strategies, but not for long. As they are discovered they get arbitraged away. IMO this is one of the reasons that hedge fund performance is so jagged and is overall a losing proposition. IIRC CALPERS has totally eliminated hedge funds from their holdings, as have other institutional managers.
 
Not trying to change anyone's behavior. Just the idea that indexes will always win makes little sense, though they are a good approach for many investors.
 
Montecfo said:
"Active Funds are on Top Again"
"Just over half of US stock funds outperformed the average passive portfolio for the year through May" ...
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No fears. The earth is still on its axis and the magnetic poles have not reversed.

Articles like this come around every once in a while, seemingly more frequently in down markets. This is probably because (a) publications rely on active funds for advertising income and (b) there is an oft-repeated fallacy that while active management cannot beat the market on the upside, it can protect investors on the downside.

The truth is that there are always going to be active managers who outperform. Just like there are always casino winners appearing on billboards holding giant checks. The rest of the truth is that the longer the measurement period, the fewer outperformers. Roll the dice once and get a winner, call the advertising department. Keep rolling and you regress to the mean, as identified in the arithmetic paper by he who shall not be named.

Chuckanut said:
... When I am interested in investing for the short term, I may look into this.
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Well the active winners will always be there. Different ones every time. So how to pick winners ahead of time? Here is a list of things that are known to not work:

38349-albums263-picture2672.jpg

​
If you find a method that works, please let us know. That is the holy grail of mutual fund investing.
 
A given active manager can beat their index 1, 2 or, rarely, 3 years in a row, so 5 months of outperformance really isn’t noteworthy to me. Of course, mutual funds’ advertising departments will, nevertheless, declare “The fund beat it’s benchmark!!!*****” followed by the tiniest, hardest to read footnote:

******for the five month period ending May 31.
 
Montecfo said:
Not trying to change anyone's behavior. Just the idea that indexes will [-]always[/-] win makes little sense to me ...
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FTFY Actually, of the 8,000 or so funds, there is always a tiny fraction that outperforms over longer periods. The problem is identifying them ahead of time. See post #36.
 
Just keeping things fact-based. For their relatively short lives indexes have benefitted from a steadily rising Fed fueled market and a steady move to indexes, which of course is self-fulfilling.

In more dynamic markets and without wind at their sails, it is a bit tougher.
 
OldShooter said:
FTFY Actually, of the 8,000 or so funds, there is always a tiny fraction that outperforms over longer periods. The problem is identifying them ahead of time. See post #36.
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It's not that hard and I've listed them several times. They are out there. So yes, index funds beat most actively managed funds, just not the actively managed funds I put my money into.

I would also suggest people with index funds that believe we are at bottom or near bottom and that want to recover from this latest downturn in the market should invest in actively managed funds as they fell further than index funds and will rise faster than index funds.
 
Montecfo said:
Just keeping things fact-based. For their relatively short lives indexes have benefitted from a steadily rising Fed fueled market and a steady move to indexes, which of course is self-fulfilling. In more dynamic markets and without wind at their sails, it is a bit tougher.
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You really should read and understand that paper on the arithmetic of active management by he who shall not be named. Until you can tell me what's wrong with it, I won't be responding here any more.

Also, for the record, index funds were invented at Wells about 55 years ago. Bogle created the first fund offered to the public about 45 years ago.
 
That index funds are relatively new is not seriously in question. As recently as 2000, index funds comprised 3% of the stock market capitalization, and active mutual funds were 6X that.

These discussions can veer into the realm of what seems more like religion, so I try to just keep it fact-based.

I own an index or two, but they are simply tools, means to an end. I see their benefits and limits and I use them accordingly. Same as a screwdriver or a wrench. Most of my holdings are individual securities.

Trying to say one is always better than the other is to ignore facts on the ground and the task at hand, in my view.

Cheers!
 
Montecfo said:
Trying to say one is always better than the other is to ignore facts on the ground and the task at hand, in my view.
Cheers!
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Simple math is proof positive that over the long run, index funds will outperform managed funds 100% of the time. It's not even a question for debate, just math.
 
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frayne said:
Simple math is proof positive that over the long run, index funds will outperform managed funds 100% of the time. It's not even a question for debate, just math.
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Yep, just math. Going back 34 years to 1988 I put seed money of $10,000 in Vanguard S&P 500 Index fund and also in Fidelity Blue Chip Growth and Franklin Dynatech. No subsequent investments. All dividends reinvested.

This exercise was repeated every four years. Put $10,000 in each of these funds on January 1, 1992. Repeat for January 1, 1996, and so forth. In my example, the index fund beat the active funds one time out of eighteen tries, or 5.5%. The one time the index beat my active funds was putting $10,000 into each fund on Jan 1, 2020, but 18 months--that's not the long haul, is it?

Generally speaking, yes, index funds will beat the universe of active funds over the long haul. However, it's depends on which active funds you choose.

VFINX Index Vs Active Funds.jpg
 
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frayne said:
Yes and therein lies the problem, which actively managed funds do you choose ? :cool:
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Those funds that have a history of beating the index, for starters. Look for low fees too.

I listed two of my favorites, FBGRX and FKDNX. I also like TRBCX and FOCPX, though they are similar to FBGRX. These are large cap funds.
 
Qs Laptop said:
Yep, just math. Going back 34 years to 1988 I put seed money of $10,000 in Vanguard S&P 500 Index fund and also in Fidelity Blue Chip Growth and Franklin Dynatech. No subsequent investments. All dividends reinvested.

This exercise was repeated every four years. Put $10,000 in each of these funds on January 1, 1992. Repeat for January 1, 1996, and so forth. In my example, the index fund beat the active funds one time out of eighteen tries, or 5.5%. The one time the index beat my active funds was putting $10,000 into each fund on Jan 1, 2020, but 18 months--that's not the long haul, is it?

Generally speaking, yes, index funds will beat the universe of active funds over the long haul. However, it's depends on which active funds you choose.

View attachment 43041
Click to expand...

Which ones should we choose going forward? If you can do THAT, you need to start your own company.:cool:
 
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