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Has anyone done the analysis to see if the stock-picking by those managers was worth anything at all? Obviously it wasn't worth the fees they charged. But if a

by dsr_ 9y ago

Has anyone done the analysis to see if the stock-picking by those managers was worth anything at all? Obviously it wasn't worth the fees they charged. But if all those fees had been flattened down to the same expense as the Vanguard fund, would their advice have been worth anything over the index? To a first approximation, it looks like the answer is no.

TuringNYC 9y ago
Investments can have a dual mandate - high returns BUT also low volatility. Many hedge funds will admit their returns may not beat the S&P500, but will counter that their returns have lower volatility -- achieving more consistent gains over time. To answer your question, sounds like the answer is still no, but it is worth noting that this whole conversation is ignoring the volatility side of the conversation.
- watsocd 9y ago
  You are correct except that doing this over 10 years somewhat removes the 'ignoring the volatility' argument.
  - icelancer 9y ago
    >>You are correct except that doing this over 10 years somewhat removes the 'ignoring the volatility' argument. Only lessens it slightly. There are plenty of bad 10-year periods you wouldn't be happy with if you were 50-55 years old with all your money in stocks, not to mention an index fund tracking the S&P500 rather than the full index. Obviously holding index funds that are primarily stocks is the play when you are younger, but risk-adjusted returns matter a lot more for someone with big money as they approach retirement. It's worth exchanging returns for lower volatility down the line. Not that I think this bet could have turned out any other way, of course...
  - TuringNYC 9y ago
    Depends on whether there was a major market correction in those 10 years. A better betting period would be 20 years, which almost certainly guarantees 1 and possibly 2 or 3 market corrections. Hedge funds would argue that they perform better in downcycles, possibly even with negative correlation to the market.
- smeyer 9y ago
  But the opposing bettor got to pick the funds, it's not like Buffett forced anyone to pick funds with risk profiles less likely to result in beating the market.
- misnamed 9y ago
  I would like to see them compare themselves to a stock and bond portfolio of similar volatility. Ordinary investors can reduce volatility with bonds for a lot less in fees.
- valuearb 9y ago
  Ted Seides got the worst market crash in a hundred years and still got crushed. Volatility and hedging never matter in the long run, fees do and Teds structure is a fee maximization device that's a winner for him but a loser for investors.
ThrustVectoring 9y ago
If it's just stock-picking as opposed to getting access to a wider variety of investments, then it's very difficult for active stock picking to be worth anything. If stocks are owned just by stock-pickers and passive indexers, then they own the same stocks in the same proportion. The only thing active funds can do is invest in things that passive indexes don't, or better take advantage of the "dumb money". Things like high-frequency trading definitely count here. Pure stock-picking though? Yeah, anyone who outperforms is on the other side of trades that underperform, so you're going to run into issues.
- guelo 9y ago
  But the hedge funds in Buffet's bet did make those wider variety types of investments.
- jonahx 9y ago
  > Yeah, anyone who outperforms is on the other side of trades that underperform, so you're going to run into issues. True, but it's not like the bet is already decided because of this mathematical fact. In theory the good pickers can predict the outperformers. It's a surprising claim that this is, essentially, not possible -- or at least only marginally possible to a degree that's cancelled out by fees.
  - ThrustVectoring 9y ago
    If you average together a lot of stock pickers, you wind up with roughly a market-cap weighted index. If you average together everyone who holds stock, you wind up with exactly the market-cap weighted index.
    - jonahx 9y ago
      Right. But it's still surprising that "experts" can't make a biased selection that is better than the exact average. On average, basketball teams in the NBA score X points per game. You now get to pick 5 teams and average just their scores. I'd imagine in that situation it's pretty easy to beat the league average. Again, it's a surprising and non-trivial fact that this isn't the case in the stock market, roughly speaking.
hyperpape 9y ago
I can't vouch for this source, but here's a claim that alpha is real: https://blogs.cfainstitute.org/investor/2016/07/26/is-active-management-dead-not-even-close/ https://blogs.cfainstitute.org/investor/2016/07/26/is-active....
- valuearb 9y ago
  Buffett alone is proof enough that Alpha is real. The real problem is, how can you or I pick the next Buffett instead of the next Ted Seides? The answer, we can't.
  - dsacco 9y ago
    And even if you luckily (or maybe skillfully) could, you'd most likely have a relatively small window of access before they no longer needed your capital unless you were a very large investor (on the order of a few years).
    - deleted 9y ago
      [deleted]
  - mcguire 9y ago
    The Superinvestors of Graham-and-Doddsville https://www8.gsb.columbia.edu/articles/columbia-business/superinvestors https://www8.gsb.columbia.edu/articles/columbia-business/sup...

by dsr_ 9y ago

TuringNYC 9y ago

Investments can have a dual mandate - high returns BUT also low volatility. Many hedge funds will admit their returns may not beat the S&P500, but will counter that their returns have lower volatility -- achieving more consistent gains over time. To answer your question, sounds like the answer is still no, but it is worth noting that this whole conversation is ignoring the volatility side of the conversation.

watsocd 9y ago
You are correct except that doing this over 10 years somewhat removes the 'ignoring the volatility' argument.
- icelancer 9y ago
  >>You are correct except that doing this over 10 years somewhat removes the 'ignoring the volatility' argument. Only lessens it slightly. There are plenty of bad 10-year periods you wouldn't be happy with if you were 50-55 years old with all your money in stocks, not to mention an index fund tracking the S&P500 rather than the full index. Obviously holding index funds that are primarily stocks is the play when you are younger, but risk-adjusted returns matter a lot more for someone with big money as they approach retirement. It's worth exchanging returns for lower volatility down the line. Not that I think this bet could have turned out any other way, of course...
- TuringNYC 9y ago
  Depends on whether there was a major market correction in those 10 years. A better betting period would be 20 years, which almost certainly guarantees 1 and possibly 2 or 3 market corrections. Hedge funds would argue that they perform better in downcycles, possibly even with negative correlation to the market.
smeyer 9y ago
But the opposing bettor got to pick the funds, it's not like Buffett forced anyone to pick funds with risk profiles less likely to result in beating the market.
misnamed 9y ago
I would like to see them compare themselves to a stock and bond portfolio of similar volatility. Ordinary investors can reduce volatility with bonds for a lot less in fees.
valuearb 9y ago
Ted Seides got the worst market crash in a hundred years and still got crushed. Volatility and hedging never matter in the long run, fees do and Teds structure is a fee maximization device that's a winner for him but a loser for investors.

ThrustVectoring 9y ago

If it's just stock-picking as opposed to getting access to a wider variety of investments, then it's very difficult for active stock picking to be worth anything. If stocks are owned just by stock-pickers and passive indexers, then they own the same stocks in the same proportion. The only thing active funds can do is invest in things that passive indexes don't, or better take advantage of the "dumb money". Things like high-frequency trading definitely count here. Pure stock-picking though? Yeah, anyone who outperforms is on the other side of trades that underperform, so you're going to run into issues.

guelo 9y ago
But the hedge funds in Buffet's bet did make those wider variety types of investments.
jonahx 9y ago
> Yeah, anyone who outperforms is on the other side of trades that underperform, so you're going to run into issues. True, but it's not like the bet is already decided because of this mathematical fact. In theory the good pickers can predict the outperformers. It's a surprising claim that this is, essentially, not possible -- or at least only marginally possible to a degree that's cancelled out by fees.
- ThrustVectoring 9y ago
  If you average together a lot of stock pickers, you wind up with roughly a market-cap weighted index. If you average together everyone who holds stock, you wind up with exactly the market-cap weighted index.
  - jonahx 9y ago
    Right. But it's still surprising that "experts" can't make a biased selection that is better than the exact average. On average, basketball teams in the NBA score X points per game. You now get to pick 5 teams and average just their scores. I'd imagine in that situation it's pretty easy to beat the league average. Again, it's a surprising and non-trivial fact that this isn't the case in the stock market, roughly speaking.

hyperpape 9y ago

I can't vouch for this source, but here's a claim that alpha is real: https://blogs.cfainstitute.org/investor/2016/07/26/is-active-management-dead-not-even-close/ https://blogs.cfainstitute.org/investor/2016/07/26/is-active....

valuearb 9y ago
Buffett alone is proof enough that Alpha is real. The real problem is, how can you or I pick the next Buffett instead of the next Ted Seides? The answer, we can't.
- dsacco 9y ago
  And even if you luckily (or maybe skillfully) could, you'd most likely have a relatively small window of access before they no longer needed your capital unless you were a very large investor (on the order of a few years).
  - deleted 9y ago
    [deleted]
- mcguire 9y ago
  The Superinvestors of Graham-and-Doddsville https://www8.gsb.columbia.edu/articles/columbia-business/superinvestors https://www8.gsb.columbia.edu/articles/columbia-business/sup...