Active investors on the forum

I feel like I am in the wrong forum. I wish all the best to you (so many!) actively managed funds enthusiasts, but they are not for me.

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Yeah me too! Back to Bogleheads lol.

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Wasn’t aware of that this is an ETF only forum.
There are several ways to Rome and believe it or not, there are some people around the world and in this forum who reach better results;risk/reward ratios than investing just in ETFs. And sometimes it just makes more fun to chose a more active approach. Gladly everybody can chose for itself. :blush:

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Of course there are, but there won’t be a single one over a span of 30+ years.

[Splitting the conversations to not be too off-topic]

That’s quite a strong and dogmatic statement. Out of curiosity, what would need to happen so that you update your point of view? Because you know, i can find you investors with 30+ years of outperformance…

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Well how many funds are there that outperformed the market for 30+ years? How many funds exist? Are we srsly talking about this?

I can also find people that won the lottery? Should we now only invest in lottery tickets?

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Weren’t you selling and buying at the beginning of this crisis (c.f. the coronavirus thread)?
Do you consider actively selling and buying passive funds passive investing? :wink:

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Based on the SPIVA report, 83.16% of the global stocks funds underperform the index on a 15 year period
https://us.spindices.com/documents/spiva/spiva-us-year-end-2019.pdf?force_download=true. 89.10% for the US funds.

On the DFA analysis, 77% of the stocks funds underperform on a 20 years periods https://hub.dimensional.com/exLink.asp?40838454OC19S68I88753842

You can also check the consistency of the funds which is quite low (page 8 on the DFA report).

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Does this include all the funds that got closed in the meantime aka failed funds?

83-90% fail to match the market returns. So what makes people think that they can be in the 10% and beat professional fund managers with hundreds of specialists?

Yes.

Why do people play at the casino?

Also, pension fund, endowment are not doing better : https://us.spindices.com/indexology/core/spiva-institutional-scorecard

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Simple: You just need one stock to do so. If you manage to overweight just one stock that’s outperforming, with all other things being equal, you’ll be ahead of the market.

In its most radical form, you need to identify one company that’s going to outperform mid- to long-term - and then maybe go all in on.

Like I (correctly) did with Apple, at the time they brought. Well, unfortunately I stopped at “identifying” them back them. The only thing preventing me from going “all in” and getting rich since then has been the fact that I didn’t have investable savings back then - and my risk-aversion.

I’d ask the question: How many actively managed funds pursue a selective and strong-conviction buy&hold strategy?

How many fund managers are being paid to manage a (“reasonably”) diversified portfolio?
Most, probably.

Also, how many are paid for inactivity, i.e. doing nothing? Few, probably. That’s why they’ll keep wheeling and dealing with their portfolio.

I think it’s incredibly hard, nigh impossible, to outperform the market with a diversified portfolio over the long term.

It’s not that hard to overperform if you’re “radical” enough - though you’d also might be “radically” taking risks.

Exactly. It’s not at all unlikely but rather relatively “easy” to beat the casino once. Or twice:
You bring a huge sum, you go all in on one or two bets - then call it a day and cash out.
It’s impossible to beat the casino over the long term (in luck-based games).

The difference being: expected returns at a Casino are negative - they’re positive on the stock market.

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Well thats an easy one; because institutional and so called professionals investors generally are not managing money for outperformance. But 10-20% do and those are the active investors we are looking for or even are part of this group (hopefully 30years+).

I’m sitting 20 meters away from several portfolio managers and I can asure you, only because they are called professionals they are mostly just afraid of looking bad compared to their peers. So I agree with you, that a lot of pros are not worth their money.

So you get higher returns for taking more risks. Risk that is idiosyncratic. You can also do that with using leverage. Either with margin or just leveraged ETFs.

But is this really the point here?

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So in two posts you went from “how dare you talking seriously about outperforming the market” to “between 10 and 17% of funds do outperform the market over 20 years period”. That’s actually a good news! It means that one every 6-10 fund consistently outperform the market on prolonged periods.

I did not expect the figure to be so high, but this actually makes sense:

  • around 15% outperform (the iron rule of investing is that only 20% of the people can be in the top fifth)
  • I would guess 15% seriously underperfom as well
  • the rest is a bit under the market and constitutes:
    • either passive funds that almost reach market returns
    • or “closet indexers”, i.e most funds that do not dare going too far from the index because their precious AUM are more important than outperformance (see what San Francisco and Strutra2007 are saying above). In addition to their career risk they need to pay for the marketing, as well as all the commissions to middle men like Cortana to sell the fund to clueless retail clients. Good funds really don’t need middle men…

It must be hard for EMH academics to see that the theory does not work 15% of the time…

Now i don’t know about you, but when i see :

  • that one every six fund overperforms over 20 years,
  • the monstruous effects 20 years of compounding at superior returns has on a portfolio,
    I do not find it so insane to try to figure out what those funds are and what are their characteristics.

That’s actually a good question: while 20 years is usually easy to find, 30 is harder because very often fund managers start their funds in their forties, so 30 years lead far into retirement age. But i did not skip on the task, and here is what i found anyway in less than 10 minutes, thanks for asking:

  • More than 30 years of outperformance:

    • Warren Buffett, 19 % over 55 years
    • Walter Schloss, 21% over 50 years
    • Charlie Munger, 19% over 45+ years
    • George Soros, 18+% over 35 years
    • Stanley Druckenmiller, 30+% over 30 years, only 5 quarters of losses out of 120
    • Jim Simons, 39+ per year since 1990 (after fees. before fees, we are at 66% per year)
    • Jean Marie Eveillard, 15.8% since 1979
    • Ruane, Cunniff & Goldfarb, 14.65% from 1970 to 2015
    • John Templeton, 18+% over 38 years
    • Philip Carret, 14% over 55 years
    • Shelby Davis, 23% over 45 years
  • More than 20 years of outperformance (and counting)

    • Joel Greenblatt, 40+ over 20 years, 1985-2006
    • Richard Pzena, 16+% since 1996
    • Li Lu, 30+% since 1998
    • Chuck Akre (first at FBR focus fund, now at Akre Capital Management) 18+% over 27+ years
    • Terry Smith, 14+% since 2003

I cannot speak for all active investors, but i personally do it by going where institutionals don’t go: micro-caps, small special situations (spinoffs…). For instance, I found recently in the sub $50million market cap space a good company with 25% return on invested capital , little debt, on the way to almost double revenues and margins and selling at 8 times earnings. This kind of inefficiencies do not happen that often in bigger caps. Except last month.

And also, i spent the last 4 years learning about accounting, valuation and businesses, reading case after case of shareholder letters and trying to apply it to the real world. I guess that makes me more prepared than the hordes of indexers who’ve been told that it is not even worth trying.

On the topic of skill, luck and lottery, i invite you to read this essay and come back with constructive counterarguments. When outperformance is reached with random strategies, you could argue that the guys were just lucky. When they all use the same tenets and philosophy, you start asking questions. That makes just too many lucky monkeys typing randomly Hamlet on a typewriter by sheer luck.

Don’t get me wrong, i never said that passive is bad nor that you should not do it. What i say once again however, is that the world is not simply black and white with passive guys on the good side and evil managers on the other. There are simply many more nuances than you think.

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You know it’s always easy to call the winner after the game is already over. Which investor or fund will outperform the market in the next 20-30 years? Probably not a single one of your list from the last 20-30 years (probably with Jim Simons as the only exception).

But if you know, I would be happy if you told me. So I could just sell all my ETFs and go with that. If not, I see no reason to abandon my Bogle dogma.

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Yeah, of course it depends how much time you want to invest in this “job”, how much pleasure you get from this and if you can can/prefer invest the same time in your current job (or other sidejobs) to improve your returns…
I like economics but up to a certain point, after that if becomes for me a burden and I prefer to use my (limited) free time for something else… to each its own ! :slight_smile:

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Well, most of them will be retired or dead in 20-30 years, so fair enough. But i’d counter-argue that for most of them, you could have picked them after 15 years of outperformance and still enjoy at least another 20 years of outstanding results. So the hindsight bias argument does not hold here.

But you know, i might take you on this one.Let’s look at the younger managers of the list.
You seem to think that for instance, none of Terry Smith, Li Lu, Richard Pzena and Chuck Akre will continue to outperform in the foreseeable future. I think the contrary, and would even add Guy Spier and Mohnish Pabrai to the list. So let’s mark my words and come back in five years to see if those guys were just lucky bastards.

As an aside question, if you are so sure that none except probably Jim Simons will continue to outperform, why don’t you short their strategies relative to the S&P?

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If I may step in, I think he’s more of an agnostic than atheist in this regard (at least I am). Some of these guys may be legitimate gods of investing, some may just be charlatans, but you won’t know until they’re old and you’re old and even then you won’t be able to tell if they still got it.

Ben Felix gave a great example of some well known fund managers with a track record that spanned over multiple decades, only to miserably end up trailing the market at some point.

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There are hundred thousands of investors and of course you’ll end up knowing only about the successful ones. The many thousands that failed won’t ever get your attention, because they don’t get famous. That’s why the list of outperformers is so short. And you can’t really tell if it’s due to luck or skill, because 30 years aren’t enough to be statistically relevant. We’ll probably know in 100+ years.

The issue still remains: if you look at the best 10% performers of the last 10 years, only a very small amount of them will be in this group for the next 10 years. It’s just impossible to know it in advance and it will be pure luck if you took the right one. Your chance of future outperformance by picking a previous outperformer gets even smaller.

Why should I risk underperforming the market? Why should I put myself in a situation where I might question the whole thing?

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You know, it is perfectly fine if YOU don’t want to do any active investing. Passive indexing is good and benefits from the huge feature that it does not make you do any huge mistake.

But then don’t come to criticise active investors by constantly repeating the two same arguments that have been already busted above, that is:

  • “The list of outperformers is so short” => yourself said that 10 to 17% of funds/managers do outperform over 20 years. TWENTY years, this is not tiny nor statistically insignificant
  • “It’s survivorship bias/hindsight bias and you cannot know if it is luck or skill nor if X is still going to outperform” => I gave you a link to an essay written by Buffett himself busting these exact claims, but you did not even read it nor acknowledge it. It has been written in 1984, and since then has been proven right and right again, because all the outperfomers cited in this paper went on to continue to outperform 20+ years. Please read it, and if you are not convinced then provide constructive counterarguments.
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