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The article describes the paradox. The average fund manager will perform as well as the market, but they charge fees so the net return is less. If you think yo

The article describes the paradox. The average fund manager will perform as well as the market, but they charge fees so the net return is less. If you think you are able to pick out better fund managers, then you should be picking stocks instead. If you're unable to pick stocks, what makes you think you're able to pick managers when you are working off opaque trades and even less information?

jdoliner 11y ago
That is a very elegant bit of deductive reasoning. It makes their demise seem inevitable.
bambax 11y ago
I'm not defending asset managers but your argument sounds specious: you only need to pick an asset manager once, whereas you need to pick stocks every day or several times a day. I can't fix my car but I can pick a garage based on reviews, etc.
- nostrademons 11y ago
  You only need to pick a stock once too. Or at most, once per several years. If you're trading stocks every day you're doing it wrong. And you have a lot more information available about stocks than you do about fund managers.
  - TheLogothete 11y ago
    Are you serious? You need a PORTFOLIO of stocks. It is an ONGOING effort.
    - tormeh 11y ago
      Nah. Depends on whether you're in it for the average or the variance. If you're in it for the average you might as well pick an index fund.
      - TheLogothete 11y ago
        Don't start with this condescending "nah" when you are going to make a qualification after that and exclude the very case we are discussing here.
        tormeh 11y ago
        Sorry, didn't know it had condescending connotations.
    - nostrademons 11y ago
      You need an information advantage to pick stocks. You need to have some reason to believe you have information that the rest of the market does not (or that the rest of the market is ignoring), which lets you better estimate the future profits of the company. And then you compare that against the market price, and if the market is being irrational, trade. If you have this, you can get by with a very small portfolio, often just a handful of stocks. And the only ongoing effort is to periodically re-evaluate whether the market has caught on to the information advantage that you're trading on. You do need to continue to keep informed, but daily trading is ridiculous. If you do not have this, you will lose your shirt regardless of how much you diversify.
      - TheLogothete 11y ago
        >You need an information advantage Yeah, exactly my point. You need to spend >20 hours to research a single company and will chose to invest in 1 out of 10. Those are the optimistic numbers. So 5 stocks is 1000 hours. How many hours to learn how to do your due diligence? How many hours per month, every month to keep an eye on what is going on and optimize if necessary?
        jyu 11y ago
        The information advantage is when you know something that's true that most people haven't yet realized to be true, often accredited to Peter Thiel. Examples from the past: - Smartphones > dumb phones (invest in AAPL) - more dollars spent with online ads than TV and Print (invest in GOOG) - cloud computing is better than managing your own servers (invest in AMZN) - eating Chipotle is a better option than McDonalds (invest in CMG) These information advantages are not necessarily gained by spending many hours of research, but a side effect from every day living and working. Will a research analyst realize the impact of a scalable computing API more than engineers that relies on it for their careers? A future example: If you're a programmer using Github for every job in the past 10 years, maybe buying Github stock if it IPO's wouldn't be so bad.
        TheLogothete 11y ago
- deleted 11y ago
  [deleted]
- hkmurakami 11y ago
  Until the head asset manager you "hired" effectively retires and hands the reins to youngins without ever telling you what went down. I've seen this happen many times.
- fsloth 11y ago
  "you need to pick stocks every day or several times a day." The usual advice for beginners is to revise ones portofolio between long intervals, say, once per year, record the specific reasons a purchase or sale was done, and progress with patience and not running after the market. Stocks with dividens provide an interest to ones investment regardless how their price evolves in day trading.
mootothemax 11y ago
I think ignorance also plays a part. For example, I myself thought that one of the reasons for going with a decent fund manager was access to e.g. IPOs at the discount price (+ inevitable fees) that the partner bank had access to. If you're not able to take advantage of such things, I really don't understand the appeal. (but then - having such large sums of money that I need help investing them would be quite a nice problem to have!)
vostok 11y ago
>If you think you are able to pick out better fund managers, then you should be picking stocks instead. I'm not sure this is right. You wouldn't say that you should be designing if you think you can hire a designer. There's no reason that hiring a good fund manager is different. For what it's worth, I'm not good at picking managers or picking stocks with my own money so I choose a parsimonious approach.
onion2k 11y ago
That only works if you believe the skills needed to choose a fund manager are the same skills needed to choose stocks. That's seems unlikely. If I've consistently picked terrible stocks for years, performing at 20% less than the market, and then I meet a fund manager who has has consistently performed at 20% above the market, are you suggesting I can't know whether or not he's better than me?
- vehementi 11y ago
  Indeed - it's like saying if you can't identify good football players, you shouldn't go about choosing good coaches / managers.
- lifeisstillgood 11y ago
  For the past few years, yes you can. For the next few...? Surely you have an idea why you picked stocks that seemed good ideas but were not. What was the missing piece of information you did not have or the missing model you were not using?
- jib 11y ago
  Survivorship bias may hint at you not being able to. Whether stock picking is luck based or not, there are (almost) no fund managers currently working who performed 20% under the market over the last 5 years.
- HappyTypist 11y ago
  Indeed. Past performance is a terrible indicator for future performance, especially for fund managers. A Morningstar study found that there is no correlation between historical performance and future performance, i.e. the top 25% of funds in one year was spread evenly across the spectrum in future years. This was after adjusting for survivorship bias. So, you cannot look at performance as an indicator.
vehementi 11y ago
Wouldn't the average fund manager only perform as well as the market if the market consisted only of fund managers? The definition of average here also needs qualification -- surely it's weighted by size of assets, so one huge, poorly performing fund manager should allow for the existence of many small market-beating ones. No?
- deleted 11y ago
  [deleted]
- HappyTypist 11y ago
  You are right, but it also follows that a huge poorly performing fund won't stay huge for long.

jdoliner 11y ago

That is a very elegant bit of deductive reasoning. It makes their demise seem inevitable.

bambax 11y ago

I'm not defending asset managers but your argument sounds specious: you only need to pick an asset manager once, whereas you need to pick stocks every day or several times a day. I can't fix my car but I can pick a garage based on reviews, etc.

nostrademons 11y ago
You only need to pick a stock once too. Or at most, once per several years. If you're trading stocks every day you're doing it wrong. And you have a lot more information available about stocks than you do about fund managers.
- TheLogothete 11y ago
  Are you serious? You need a PORTFOLIO of stocks. It is an ONGOING effort.
  - tormeh 11y ago
    Nah. Depends on whether you're in it for the average or the variance. If you're in it for the average you might as well pick an index fund.
    - TheLogothete 11y ago
      Don't start with this condescending "nah" when you are going to make a qualification after that and exclude the very case we are discussing here.
      - tormeh 11y ago
        Sorry, didn't know it had condescending connotations.
  - nostrademons 11y ago
    You need an information advantage to pick stocks. You need to have some reason to believe you have information that the rest of the market does not (or that the rest of the market is ignoring), which lets you better estimate the future profits of the company. And then you compare that against the market price, and if the market is being irrational, trade. If you have this, you can get by with a very small portfolio, often just a handful of stocks. And the only ongoing effort is to periodically re-evaluate whether the market has caught on to the information advantage that you're trading on. You do need to continue to keep informed, but daily trading is ridiculous. If you do not have this, you will lose your shirt regardless of how much you diversify.
    - TheLogothete 11y ago
      >You need an information advantage Yeah, exactly my point. You need to spend >20 hours to research a single company and will chose to invest in 1 out of 10. Those are the optimistic numbers. So 5 stocks is 1000 hours. How many hours to learn how to do your due diligence? How many hours per month, every month to keep an eye on what is going on and optimize if necessary?
      - jyu 11y ago
        The information advantage is when you know something that's true that most people haven't yet realized to be true, often accredited to Peter Thiel. Examples from the past: - Smartphones > dumb phones (invest in AAPL) - more dollars spent with online ads than TV and Print (invest in GOOG) - cloud computing is better than managing your own servers (invest in AMZN) - eating Chipotle is a better option than McDonalds (invest in CMG) These information advantages are not necessarily gained by spending many hours of research, but a side effect from every day living and working. Will a research analyst realize the impact of a scalable computing API more than engineers that relies on it for their careers? A future example: If you're a programmer using Github for every job in the past 10 years, maybe buying Github stock if it IPO's wouldn't be so bad.
        TheLogothete 11y ago
deleted 11y ago
[deleted]
hkmurakami 11y ago
Until the head asset manager you "hired" effectively retires and hands the reins to youngins without ever telling you what went down. I've seen this happen many times.
fsloth 11y ago
"you need to pick stocks every day or several times a day." The usual advice for beginners is to revise ones portofolio between long intervals, say, once per year, record the specific reasons a purchase or sale was done, and progress with patience and not running after the market. Stocks with dividens provide an interest to ones investment regardless how their price evolves in day trading.

mootothemax 11y ago

I think ignorance also plays a part. For example, I myself thought that one of the reasons for going with a decent fund manager was access to e.g. IPOs at the discount price (+ inevitable fees) that the partner bank had access to. If you're not able to take advantage of such things, I really don't understand the appeal. (but then - having such large sums of money that I need help investing them would be quite a nice problem to have!)

vostok 11y ago

>If you think you are able to pick out better fund managers, then you should be picking stocks instead. I'm not sure this is right. You wouldn't say that you should be designing if you think you can hire a designer. There's no reason that hiring a good fund manager is different. For what it's worth, I'm not good at picking managers or picking stocks with my own money so I choose a parsimonious approach.

onion2k 11y ago

That only works if you believe the skills needed to choose a fund manager are the same skills needed to choose stocks. That's seems unlikely. If I've consistently picked terrible stocks for years, performing at 20% less than the market, and then I meet a fund manager who has has consistently performed at 20% above the market, are you suggesting I can't know whether or not he's better than me?

vehementi 11y ago
Indeed - it's like saying if you can't identify good football players, you shouldn't go about choosing good coaches / managers.
lifeisstillgood 11y ago
For the past few years, yes you can. For the next few...? Surely you have an idea why you picked stocks that seemed good ideas but were not. What was the missing piece of information you did not have or the missing model you were not using?
jib 11y ago
Survivorship bias may hint at you not being able to. Whether stock picking is luck based or not, there are (almost) no fund managers currently working who performed 20% under the market over the last 5 years.
HappyTypist 11y ago
Indeed. Past performance is a terrible indicator for future performance, especially for fund managers. A Morningstar study found that there is no correlation between historical performance and future performance, i.e. the top 25% of funds in one year was spread evenly across the spectrum in future years. This was after adjusting for survivorship bias. So, you cannot look at performance as an indicator.

vehementi 11y ago

Wouldn't the average fund manager only perform as well as the market if the market consisted only of fund managers? The definition of average here also needs qualification -- surely it's weighted by size of assets, so one huge, poorly performing fund manager should allow for the existence of many small market-beating ones. No?

deleted 11y ago
[deleted]
HappyTypist 11y ago
You are right, but it also follows that a huge poorly performing fund won't stay huge for long.