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> Mr. Paulson’s fall from stock-trading stardom underscores a common disclaimer in industry parlance: Past performance is no guarantee of future returns. In fa

> Mr. Paulson’s fall from stock-trading stardom underscores a common disclaimer in industry parlance: Past performance is no guarantee of future returns. In fact, I recall reading somewhere that they're negatively correlated. If you want to put your money in a fund, your odds are better if you pick one that has just had a bad year.

tedsanders 10y ago
> If you want to put your money in a fund, your odds are better if you pick one that has just had a bad year. Everyone - please don't make claims like this on HN. It's not adding value to anyone's life when you speculate incorrectly on financial advice. I will pay you $500 if you can share serious evidence that the market can be outperformed by buying mutual funds that did poorly the prior year. (I am serious. Though of course, if it were true, you would stand to make billions beyond my $500.)
- xioxox 10y ago
  Not looked in this much, but here's an old paper from a simple search: http://onlinelibrary.wiley.com/doi/10.1111/j.1468-5957.1994.tb00350.x/abstract http://onlinelibrary.wiley.com/doi/10.1111/j.1468-5957.1994.... (I've only read the abstract)
  - tedsanders 10y ago
    Great find. Though of course one study is unlikely to be definitive. (http://slatestarcodex.com/2014/12/12/beware-the-man-of-one-study/ http://slatestarcodex.com/2014/12/12/beware-the-man-of-one-s...) Here are 15 more articles on mutual fund persistence: http://www.altruistfa.com/readingroomarticles.htm#Persistence http://www.altruistfa.com/readingroomarticles.htm#Persistenc.... I have not read them all, but my impression of the literature is that: (1) There is slight positive serial correlation in mutual fund returns (2) Most of the slight positive serial correlation comes from bad performers staying bad performers (rather than good performers staying good performers) Theoretically, I find the notion of positive serial correlation far more likely than negative serial correlation. It seems more plausible to me that good fund managers would stay good than that managers would tend to oscillate from good to bad to good on an annual time scale. In general, negative serial time correlations are generally harder to explain because a negative number squared is positive. Any sort of "rebounding" effect will result in oscillatory behavior, which will only be detectable over a certain time scale. Measuring a positive linear relationship is easier than measuring a negative linear relationship, because the negative solution will have an associated time scale. (That is, solutions that drift/diffuse can be captured over many time scales & sampling rates, whereas solutions that oscillate can only be captured near the rate of oscillation. On time scales that are very zoomed in or very zoomed out, you won't notice that the system is oscillating.) Much of this is handwavy and applies only to linear correlation, but hopefully the point is clear nonetheless.
- ScottBurson 10y ago
  Well, I didn't say the odds were much better -- only that they were better :-)
  - tedsanders 10y ago
    I am very bothered by your comments and your smiley face. Please do not give incorrect and speculative investment advice. You have supplied zero evidence that the odds are better. They are very very likely not better. I apologize for my lack of humor. I find the issue serious right now.
pgwhalen 10y ago
Really? I'd be curious to see that source. It would seem to imply that it's not pure chance, but that you maybe learn from a bad year.
- MR4D 10y ago
  It's called reversion to the mean, and very well known among professional investors. http://www.investopedia.com/terms/m/meanreversion.asp http://www.investopedia.com/terms/m/meanreversion.asp
  - vufas 10y ago
    Link discussing the more general statistical phenomenon in greater detail: https://en.wikipedia.org/wiki/Regression_toward_the_mean https://en.wikipedia.org/wiki/Regression_toward_the_mean
  - jstanley 10y ago
    Reversion to the mean means they're likely to improve, relative to their past performance. It doesn't mean they're likely to do well.
jstanley 10y ago
I think you're confusing "funds that did poorly last year are likely to improve this year" with "funds that did poorly last year are likely to do well this year". Huge difference.
- ScottBurson 10y ago
  This is a very legitimate question and I'm afraid I don't remember for sure. I had a faint impression that it went slightly beyond mere mean reversion, but it's been a long time since I saw that.
- tedsanders 10y ago
  Beyond mean reversion, selection could also be an explanation. Funds with the worst returns are the funds with the highest risk. And funds with the highest risk may have higher expected returns (all else equal). Of course, with this model, past winners would tend to outperform in addition to past losers.

tedsanders 10y ago

> If you want to put your money in a fund, your odds are better if you pick one that has just had a bad year. Everyone - please don't make claims like this on HN. It's not adding value to anyone's life when you speculate incorrectly on financial advice. I will pay you $500 if you can share serious evidence that the market can be outperformed by buying mutual funds that did poorly the prior year. (I am serious. Though of course, if it were true, you would stand to make billions beyond my $500.)

xioxox 10y ago
Not looked in this much, but here's an old paper from a simple search: http://onlinelibrary.wiley.com/doi/10.1111/j.1468-5957.1994.tb00350.x/abstract http://onlinelibrary.wiley.com/doi/10.1111/j.1468-5957.1994.... (I've only read the abstract)
- tedsanders 10y ago
  Great find. Though of course one study is unlikely to be definitive. (http://slatestarcodex.com/2014/12/12/beware-the-man-of-one-study/ http://slatestarcodex.com/2014/12/12/beware-the-man-of-one-s...) Here are 15 more articles on mutual fund persistence: http://www.altruistfa.com/readingroomarticles.htm#Persistence http://www.altruistfa.com/readingroomarticles.htm#Persistenc.... I have not read them all, but my impression of the literature is that: (1) There is slight positive serial correlation in mutual fund returns (2) Most of the slight positive serial correlation comes from bad performers staying bad performers (rather than good performers staying good performers) Theoretically, I find the notion of positive serial correlation far more likely than negative serial correlation. It seems more plausible to me that good fund managers would stay good than that managers would tend to oscillate from good to bad to good on an annual time scale. In general, negative serial time correlations are generally harder to explain because a negative number squared is positive. Any sort of "rebounding" effect will result in oscillatory behavior, which will only be detectable over a certain time scale. Measuring a positive linear relationship is easier than measuring a negative linear relationship, because the negative solution will have an associated time scale. (That is, solutions that drift/diffuse can be captured over many time scales & sampling rates, whereas solutions that oscillate can only be captured near the rate of oscillation. On time scales that are very zoomed in or very zoomed out, you won't notice that the system is oscillating.) Much of this is handwavy and applies only to linear correlation, but hopefully the point is clear nonetheless.
ScottBurson 10y ago
Well, I didn't say the odds were much better -- only that they were better :-)
- tedsanders 10y ago
  I am very bothered by your comments and your smiley face. Please do not give incorrect and speculative investment advice. You have supplied zero evidence that the odds are better. They are very very likely not better. I apologize for my lack of humor. I find the issue serious right now.

pgwhalen 10y ago

Really? I'd be curious to see that source. It would seem to imply that it's not pure chance, but that you maybe learn from a bad year.

MR4D 10y ago
It's called reversion to the mean, and very well known among professional investors. http://www.investopedia.com/terms/m/meanreversion.asp http://www.investopedia.com/terms/m/meanreversion.asp
- vufas 10y ago
  Link discussing the more general statistical phenomenon in greater detail: https://en.wikipedia.org/wiki/Regression_toward_the_mean https://en.wikipedia.org/wiki/Regression_toward_the_mean
- jstanley 10y ago
  Reversion to the mean means they're likely to improve, relative to their past performance. It doesn't mean they're likely to do well.

jstanley 10y ago

I think you're confusing "funds that did poorly last year are likely to improve this year" with "funds that did poorly last year are likely to do well this year". Huge difference.

ScottBurson 10y ago
This is a very legitimate question and I'm afraid I don't remember for sure. I had a faint impression that it went slightly beyond mere mean reversion, but it's been a long time since I saw that.
tedsanders 10y ago
Beyond mean reversion, selection could also be an explanation. Funds with the worst returns are the funds with the highest risk. And funds with the highest risk may have higher expected returns (all else equal). Of course, with this model, past winners would tend to outperform in addition to past losers.