Stock Pickers - Jason Zweig

[photoguy]

The abstract says "If we add back the costs in fund expense ratios, there is evidence of inferior and superior performance (nonzero true [alpha]) in the extreme tails of the cross-section of mutual fund [alpha] estimates." That's what I figured - some funds outperform. I don't see anything about being unable to identify outperforming fund managers, but it's dense as you said.

It's in the paper, somewhere near the end. Paraphrasing the argument against being able to pick the skillful manager who outperforms goes something like this:

1. there are say 100 managers that have outperformed the market
2. but under random guessing, we'd expect 95 managers to outperform the market
3. therefore to pick the manager who is actually skillful, we'd only have a 1 in 20 chance

I don't remember the actual numbers, but they were probably worse than my example.

 

[Fedup]

W/o naming the funds & time frames & the data source, anyone can say anything.

Vanguard PRIMECAP family seems to be beaten the index in the last 10 years. That's long term to me.

 

[OldShooter]

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 ..

I'm not so sure about that edge. Strong odds (I have read 95%) are that the little guy is trading with a professional on the other side of the table. The professional almost certainly knows the company better than the little guy and has access to vastly more information and resources. So if the professional has decided to sell to the little guy then he doesn't see upside in the stock vs other investment options. Conversely if he is buying then he sees upside that the little guy is walking away from.

And one of the efficient market theories says that the current price is the consensus opinion of thousands of traders, each of whom probably has all the public information on the stock, so so the price is likely to be correct. If so, then anything that anyone (not just the little guy) wins or loses is strictly luck -- unanticipated/unknown future events or information.

 

[tulak]

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

On average, they can't, because they are chasing performance. Plus, they are dealing with (hopefully) a lot more money.

On the last point, this is why Buffett doesn't perform as well now as he did in the past. It's a lot easier to invest small amounts of money than large amounts.

Editing to add: +1 to Totoro. Mostly what I said, where chasing performance = I need short-term results.