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So I have considered taking a more active approach to investing, but every time I think about I am dissuaded by the findings that actively managed funds get bea

by twtw 9y ago

So I have considered taking a more active approach to investing, but every time I think about I am dissuaded by the findings that actively managed funds get beat over the long run by index funds. For example, the Buffet bet of S&P500 beating mutual funds, the lack of correlation between fund performance from year to year, the darts thrown at NYTimes fund, etc. All these things suggest to me that actively managing can beat the indices in some years, but will be balanced out in others. I would be interested to hear more of your thoughts about this.

mancerayder 9y ago
Thanks. Well, I think there's "actively managed funds" and there's yourself. Funds are companies with infrastructures, eyes on them, politics in them. And so forth. I think it's a valid point that it's hard to time the markets and such. But as a simple person looking at companies you believe in, you can buy and hold. An example. If in 2001/2 when you saw an iPod for the first time, you thought to yourself that the company that made it has potential, maybe you bought some shares in it. That's just one of a lot of examples. Also it helps if you're in the industry that you're examining. We're in tech so maybe we've used some of the products that we believe in, and others we don't believe in. So that's one consideration. Also, hedge funds and asset managers do a bit more than buy and sell stocks. They do complex, sometimes crazy things that involve leverage, options/contracts, and very complicated instruments. There's nothing WRONG with buying a stock index fund, but if you see a company you think might have a winning product, and from some quick analysis seems like it's reasonably well managed, then that's something. Not everything has to be technical analysis of high risk biotech stocks, shorting strategies and so forth. And for the retail folks like us, we don't have to "trade" actively, as in buy and sell every day. That's my middle ground between "competing against high frequency traders or golf course CEO conversations" and "buy index fund and close my eyes for 15 years".
andr3w321 9y ago
Buffett structured his bet in a very specific manner to maximize management fees of the other side. His bet was the S&P 500 vs any five funds of funds hedge funds. This is like betting the S&P 500 vs the average return of 20 hedge funds. Of course Buffett is going to be a favorite when the investments are diluted so much and you take into account all the fees on top of fees. I think he would be a dog vs a single hedge fund or five hedge funds.
- pedrocr 9y ago
  In aggregate the market is zero sum so if you think 1 or 5 hedge funds would beat the average easily who are the suckers taking the other side of those bets?
  - andr3w321 9y ago
    The stock market is not zero sum. The people taking the other side of well managed hedge funds are usually poorly managed pension funds/hedge funds, index fund ETFs that blindly buy a bunch of stocks without looking over their financial statements, or dumb public retail investor money.
    - pedrocr 9y ago
      >The stock market is not zero sum All securities are held by someone and the total return of the market is the total return of all those securities. For someone to outperform the market he has to hold a mix of securities that outperforms and whoever holds the opposite mix underperforms. Sock market returns are very much zero sum. >the other side of well managed hedge funds are usually poorly managed pension funds/hedge funds How do you pick ones from the others? >index fund ETFs that blindly buy a bunch of stocks without looking over their financial statements That's the point of those ETFs, replicate the index exactly. If they're replicating the market average then they're doing exactly their jobs.
      - mancerayder 9y ago
        Why would you expect someone to hold the opposite mix of securities that you hold? That's a curious approach you're taking.
  - loeg 9y ago
    The market is not zero sum.
- loeg 9y ago
  If the other side was so obviously weak, why did Protégé Partners (who chose the fund-of-funds approach, actually) take the bet? http://fortune.com/2015/02/03/berkshires-buffett-adds-to-his-lead-in-1-million-bet-with-hedge-fund/ http://fortune.com/2015/02/03/berkshires-buffett-adds-to-his...

by twtw 9y ago

mancerayder 9y ago

Thanks. Well, I think there's "actively managed funds" and there's yourself. Funds are companies with infrastructures, eyes on them, politics in them. And so forth. I think it's a valid point that it's hard to time the markets and such. But as a simple person looking at companies you believe in, you can buy and hold. An example. If in 2001/2 when you saw an iPod for the first time, you thought to yourself that the company that made it has potential, maybe you bought some shares in it. That's just one of a lot of examples. Also it helps if you're in the industry that you're examining. We're in tech so maybe we've used some of the products that we believe in, and others we don't believe in. So that's one consideration. Also, hedge funds and asset managers do a bit more than buy and sell stocks. They do complex, sometimes crazy things that involve leverage, options/contracts, and very complicated instruments. There's nothing WRONG with buying a stock index fund, but if you see a company you think might have a winning product, and from some quick analysis seems like it's reasonably well managed, then that's something. Not everything has to be technical analysis of high risk biotech stocks, shorting strategies and so forth. And for the retail folks like us, we don't have to "trade" actively, as in buy and sell every day. That's my middle ground between "competing against high frequency traders or golf course CEO conversations" and "buy index fund and close my eyes for 15 years".

andr3w321 9y ago

Buffett structured his bet in a very specific manner to maximize management fees of the other side. His bet was the S&P 500 vs any five funds of funds hedge funds. This is like betting the S&P 500 vs the average return of 20 hedge funds. Of course Buffett is going to be a favorite when the investments are diluted so much and you take into account all the fees on top of fees. I think he would be a dog vs a single hedge fund or five hedge funds.

pedrocr 9y ago
In aggregate the market is zero sum so if you think 1 or 5 hedge funds would beat the average easily who are the suckers taking the other side of those bets?
- andr3w321 9y ago
  The stock market is not zero sum. The people taking the other side of well managed hedge funds are usually poorly managed pension funds/hedge funds, index fund ETFs that blindly buy a bunch of stocks without looking over their financial statements, or dumb public retail investor money.
  - pedrocr 9y ago
    >The stock market is not zero sum All securities are held by someone and the total return of the market is the total return of all those securities. For someone to outperform the market he has to hold a mix of securities that outperforms and whoever holds the opposite mix underperforms. Sock market returns are very much zero sum. >the other side of well managed hedge funds are usually poorly managed pension funds/hedge funds How do you pick ones from the others? >index fund ETFs that blindly buy a bunch of stocks without looking over their financial statements That's the point of those ETFs, replicate the index exactly. If they're replicating the market average then they're doing exactly their jobs.
    - mancerayder 9y ago
      Why would you expect someone to hold the opposite mix of securities that you hold? That's a curious approach you're taking.
- loeg 9y ago
  The market is not zero sum.
loeg 9y ago
If the other side was so obviously weak, why did Protégé Partners (who chose the fund-of-funds approach, actually) take the bet? http://fortune.com/2015/02/03/berkshires-buffett-adds-to-his-lead-in-1-million-bet-with-hedge-fund/ http://fortune.com/2015/02/03/berkshires-buffett-adds-to-his...