First I compared to the SP500 which is unfair because of dividends. Then I took the SPY ETF for comparison and that is how it looks like (since inception more or less):
I have a strong opinion about the exclusion of junk in my portfolio. I suppose that fund uses mechanical parameters, do you have a link to the rules?
It is not only to exclude junk but to reduce risk. In my dividend portfolio this is the most important aspect, I have to live off it. So I use cash flow as my main decision point: with a nice positive cash flow a company hardly can go bankrupt. I compare cash flow to debt and to enterprise value for that purpose, did write down the complete ruleset in my mechanical investment thread.
Sorry, no, I don’t. And I do also believe in ‘hard’ metrics. I try to avoid soft ESG criteria. In my home country pension funds returns are horrible and not just because of conservative increasements but also because they are pursuing a political agenda with their investments rather than prioritising returns for pensioners. So I want to say away from excessive ESG.
Factors makes life easier for mechanical investment freaks like me. Or at least it makes it easier to explain what I do.
For my living costs I do a mechanical dividend approach (factors “carry”, “value” and “momentum”). For my high risk high reward approach I use the factors “momentum” and “value”.
There are tons of publications about all factors, hundreds of years of backtests (momentum was best…).
For me a mechanical approach is probably the only way a non-psychopath can make money in the stock markets. Our brain is not built for this kind of action, that is why most simply lose money. Passive ETF investments did help here, but I started investing way before they became available and even with ETF investments you need a strong (mechanical) plan for money and position management.
So, whoever is interested in a mechanical approach, just select your factors (less is often more), then write down the rules for money- and position management and stock picking. I can help with that, just use my mechanical investments thread.
Their construction of the Z-score looks quite interesting, a bit too complicated for my gusto (KISS); in a field with that much randomness you cannot gain too much with complicate rules. My earlier performance comparison shows exactly that.
When analyzing an ETF I recommend the following:
is it mechanical?
do I understand the rules?
do the rules make sense for me?
are the rules simple?
Any “no” answer and it is out.
And most ETF are based on an index, so you have to find out the rules of that index.
Interesting, but I think there is no black or white here. Evidence for everything and the contrary of it can be found all over the internet. And I don’t think I agree that systematic successful stock-picking is really hard is an ordinary claim.
Something did put stones in our brains so we could survive. But those stones are the very thing that makes successful stock trading hard. It however can be switched off.
An ordinary claim: you reach your target faster if there are no stones blocking your way.
I clear the way by using mechanical strategies, ignore the stones in my head. And I think (and try to proof here) that systematic and successful stock trading (picking is just one part of it) is not only possible but very probable if you use and adhere to a mechanical system.
But then there is more to the story. When I started I was afraid to find the “holy grail” and that it would stop working as soon as enough people would use it. That is so… in theory.
In practice any mechanical system must do exactly two things. Buy lower and sell higher. That is all. Now with all the possible combinations of whatever we can do that gives us more mechanical systems than atoms in the universe. So yes, there is one, a working one, for anybody.
You mean all those hedge funds overperforming the index with the smartest mathematicians on earth? /s off. If you don’t believe those statistics you might as well believe the earth is flat.
You built your own passive ETF just like the majority on this forum does just without the construction part .
You contradict yourself or have not read the context. The question was about an ordinary claim. If that many people can do it, hell, if even I can do it, can it be an ordinary claim that it is hard?
Exactly. There are already more indices and even more ETF than single stocks. As I said, there are more mechanical systems than atoms in the universe because of the possible combination.
But then building the ETF is probably the least important thing, I call it the stock picking. More important is money management and position management. I have only one layer, my own. Using an ETF you already have two layers, what the ETF does and what you do. If the ETF is mechanically constructed and has decent position and money management you still can do errors by selling low and buying high.
I feel we repeat ourselves, just the flat earth theory is new and I somehow don’t understand it in this context.
Because the overwhelming majority fail (to generate alpha), the academic and statistical community treats “failure is likely” as the ordinary, default state.
In Pete’s defence, I believe he’s not talking about overperformance - his or anyone else’s - vs the S&P500, just that stock-picking is not climbing Mt Everest blindfolded, and that anyone can do it.
I feel we sometimes get too stuck to the Canon of Passive Indexing. (Canon comes from “κανόνας” in Greek, meaning “rule”). Do you see the άλφα? /s
Underperforming an index fund is only “losing money” in the imaginary world of academic finance. In the real world it’s coulda woulda shoulda.
Or that common (business) sense may play a bigger role than being a not so street smart rockstar mathematician. This could be a proxy though for controlling your behaviour better than others, keeping costs extremely low, accepting concentration and volatility (i.e. tolerance for discomfort).
In any case, my original point wasn’t so much about being a great stock picker but more about the inverse of that - i.e. just deselecting the crap, the high risk ones, etc. in a structured way.
And I don’t think I agree that systematic successful stock-picking is really hard is an ordinary claim.
Maybe the core of the disagreement is the meaning of “successful”. By “successful”, I mean outperforming a broadly diversified ETF, generating alpha. I’m not doubting you can make money by stock-picking, I’m just suspecting you have an opportunity cost with respect to the ETF.
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