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This article seems to be a short rehashing of material from the titular book. In that regard it's mostly content marketing for Index Fund Advisors Advisors, a f
by dsacco 10y ago
This article seems to be a short rehashing of material from the titular book. In that regard it's mostly content marketing for Index Fund Advisors Advisors, a firm with a bias against expensive active management (but hey, it's not exactly an unjustified bias these days :). I do think it raises a good point, just as the book did - for the most part, customers do not get rich in the markets with active management, despite how highly paid many professionals in the industry are.
It's a little enthusiastic in its point about there being no evidence that active management can be successful, even in the paper it cites. One of the difficulties with points against active management from research papers or e.g. Buffett's public bet is that the entire industry as a whole is often assessed, not just the outliers consistently capable of beating the market. The firms that can consistently beat the market exist in an entirely different strata from the rest. There are fair arguments against their ability to perform consistently, but a more honest analysis would follow the relative few that have evidenced success in the past. Otherwise they conflate "most active managers are not successful" with "the industry is based on a fundamental fallacy."
It's probably easy to read this and overlook the fact that while rare, there are indeed active managers who make their clients far richer than they are when they start, sometimes extremely so. These managers and their firms more or less quickly become richer than the dreams of avarice themselves, along with all the celebrity that comes with. It's not hard to find people who beat the market consistently - the real magic is finding them before everyone else does and prices you out of investing with them.
Finally, for the most part truly successful active managers work with institutional investors, for whom "where are their yachts?" is not necessarily a coherent question. The customers of hedge funds who become very rich are not necessarily going to indicate this in a visible way. The legitimate argument raised by the article and the corresponding book should probably have a more modern question used to convey its point.
- FabHK 10y agoI'd agree that there are some investment opportunities that can "beat the market". But typically, the average retail investor doesn't get access to them. There are some hedge funds or VC/PE firms that might have alpha, active management skills, the golden touch (or just such a reputation that they get the best deals), but they tend to be closed by now or require huge investments. If you're a Goldman partner, you'll come across some excellent investment opportunities. Furthermore, as you highlight, just like it is difficult to evaluate single stocks ex ante, it is difficult to evaluate active managers ex ante. Thus, as their expected contribution is negative, I think the advice to most retail investors to go for cheap, passive funds is sound.
- moxious 10y agoCheap passive funds are good advice if you want to maximize your return in the most frequent outcomes, but it ignores some powerful psychological stuff that's real and in play. An index fund is like a bus: everyone is going to the same place, and you're not driving. Many investors just can't deal with that, and may rationally and happily take bigger risks seeking excess returns, even if they know the odds are against them.
- FabHK 10y agoThat's a good point, though I would think you can handle a lot of that with the macro asset allocation (shares, bonds, alternative; domestic, international; etc.), which is still something one needs to do and look at every year or so.
- SirLJ 10y agoThe name of the game is proper risk management and a lot of work to find and setup a winning strategy that will work for you...
- skookumchuck 10y agoMost investors I know, even beginners, believe they can beat the market with minimal effort and essentially zero knowledge about it. The usual results are, however: http://www.businessinsider.com/forgetful-investors-performed-best-2014-9 http://www.businessinsider.com/forgetful-investors-performed...
- friedman23 10y agoThe average retail investor has access to options and margin which is more than enough to beat the market by significant amounts.
- paulpauper 10y agomargin interest is very high though
- skookumchuck 10y agoThe trouble with any successful market beating strategy is everyone will copy it as best they can, causing it to revert to mere market performance. The way to consistently beat the market is to keep your strategy a secret, have an edge (like being electrically closer to the exchange), or cheat like Bernie Madoff.
- SirLJ 10y agoAbsolutely, that's why the managers of the funds that are making money will never publish a book or paper on their strategies... The best are even returning all the client capital back and trading their own money only...
- skookumchuck 10y agoWhenever I see one of those seminars advertised "Get Rich Quick Through Real Estate Investing" I wonder why the presenter is doing seminars rather than being out getting rich through real estate investing.
- JamesBarney 10y agoBut picking managers who will beat the market is harder than picking stocks that will beat the market. Because stocks are more likely to have above market returns than funds (because of fees).
- monochromatic 10y agoThe existence of money managers who beat the market consistently is just statistics. Performance is a normal distribution.
- dsacco 10y agoThis isn't good enough. As I said in another comment, quantify it for me. I want you to demonstrate with real calculations how likely it is for a firm like RenTec to arise because you got enough monkeys in a room to hit some kind of statistical critical mass. My contention is that there aren't enough professional traders or hedge funds in the world for the number of them that enjoy astronomical success to be purely a result of chance. We have clear and irrefutable evidence of firms that consistently beat the market over 10, 20 and 30 year timespans. If you want to seriously suggest that they are a normal result of statistical distribution you'll need to really quantify that. I've never seen rigorous calculations that can support that hypothesis. Moreover, I don't understand how that argument is easier to swallow than the argument that you can reliably beat the market. What is so difficult about the idea that it is possible to reliably and legally obtain material information that the rest of the market doesn't have an edge on, or that it's possible to identify predictive patterns?
- jacobr1 10y agoThe more refined argument I've seen is that 'Alpha - Fee' is negligible, not that alpha doesn't exist. Once high-performing active managers are found they raise their fees accordingly. RenTec is one of the world's best performing funds, but also one of the most expensive. The only way to "win" with RenTec would have been to identify them BEFORE they had a proven track record. And that is much more of a gamble. Some folks have tried to address this with funds of funds. But then top performers average out and you loose most of YOUR alpha again.