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>I have personally have done quite well with my own investments, achieving a better return than the firm that I work at. This has only been possible because I h

>I have personally have done quite well with my own investments, achieving a better return than the firm that I work at. This has only been possible because I have complete insight into my risk tolerance, and don't have management and performance fees eating into my returns. How do you know it isn't just random luck? Same goes for your suggestions to invest in one "good" stock. Some will pick Amazon and profit greatly and some will pick AOL or Yahoo and be destitute. This is the whole point of diversification and the rise of index funds and I'm a little amazed to see a finance professional recommending things like this when studies repeatedly have shown that picking stocks does not work when you get a large enough sample size.

dev123456 8y ago
Exactly. In 1999 I had enough money with AOL that I could have completely paid for my 4 years of college tuition. I knew nothing about financial markets or investing but I thought and was told that AOL was a good company.....obviously that didn't last.
mruts 8y ago
Historically, many funds made their bread on charging management fees for beta, and now that index funds can do the same thing but at a much lower price, they're going to go extinct. I'm not suggesting that you put all of your money into one name, on the contrary, I think an index tracking ETF should make up the majority of one's portfolio. Maybe 20% should go into bonds or pure alpha and maybe 20% should go into 3 or 4 single name bets. Institutional investors nowadays are doing something very similar. A core of their portfolio is now cost passive maybe with some smart beta tilt. The rest is allocated into bonds or pure alpha, whill a small portion is put into high conviction equity bets or hedge funds with beta exposure. This allows them to significantly reduce their management feels.
mruts 8y ago
> I'm a little amazed to see a finance professional recommending things like this when studies repeatedly have shown that picking stocks does not work when you get a large enough sample size. If every financial professional believed that, there would no be finance professionals. With me maybe the quote is true "It's hard to make a person understand something when their job depends on them not." I work at a firm that tries to make money for their investors and if I believed it was impossible, I probably wouldn't be working for them in the first place. In no way am I an unbiased commentator, my livelihood depends on me believing that I can be smarter, than I can be better than everyone else. And while most people can't, many people can. There are a handful of funds that have demonstrated significant outperformance over a long period of time. Funds like RenTech or Bridgewater.
throwawaymath 8y ago
If you cite a few of the specific studies you're talking about, I'll be happy to explain why they're either 1) not actually concluding what you think they're concluding, or 2) simply incorrect. I can tell you very confidently that there is no academic consensus claiming alpha does not exist. It's rather the contrary, actually, and it's far more nuanced than your comment implies. Outside of academic finance you can also find pretty obvious indications that alpna exists. Berkshire Hathaway has averaged about a 20% return between 1964 and 2018. Over the same timespan the S&P 500 averaged about a 7% annual return. Smaller funds have done even better than that. When you actually do the math on some of these firms' performance, you see that the likelihood of their returns emerging by chance is too small to be explained by the number of hedge funds that has ever existed. There are funds which haven't lost money for 20 - 30 years, and whose returns are multiples of the market over the same time.
- FabHK 8y ago
  The question is not only whether alpha exists, though, but whether you can a) identify it, and b) access it. Berkshire Hathaway’s stellar outperformance seems to have declined in recent years, right, and you and I can’t invest in Renaissance’s Medallion fund. I’d concur that the individual investor has much more freedom in terms of basic asset allocation than most professional fund managers (except maybe hedge funds), but otherwise the general advice to go for a broad based index fund still stands.

dev123456 8y ago

Exactly. In 1999 I had enough money with AOL that I could have completely paid for my 4 years of college tuition. I knew nothing about financial markets or investing but I thought and was told that AOL was a good company.....obviously that didn't last.

mruts 8y ago

Historically, many funds made their bread on charging management fees for beta, and now that index funds can do the same thing but at a much lower price, they're going to go extinct. I'm not suggesting that you put all of your money into one name, on the contrary, I think an index tracking ETF should make up the majority of one's portfolio. Maybe 20% should go into bonds or pure alpha and maybe 20% should go into 3 or 4 single name bets. Institutional investors nowadays are doing something very similar. A core of their portfolio is now cost passive maybe with some smart beta tilt. The rest is allocated into bonds or pure alpha, whill a small portion is put into high conviction equity bets or hedge funds with beta exposure. This allows them to significantly reduce their management feels.

mruts 8y ago

> I'm a little amazed to see a finance professional recommending things like this when studies repeatedly have shown that picking stocks does not work when you get a large enough sample size. If every financial professional believed that, there would no be finance professionals. With me maybe the quote is true "It's hard to make a person understand something when their job depends on them not." I work at a firm that tries to make money for their investors and if I believed it was impossible, I probably wouldn't be working for them in the first place. In no way am I an unbiased commentator, my livelihood depends on me believing that I can be smarter, than I can be better than everyone else. And while most people can't, many people can. There are a handful of funds that have demonstrated significant outperformance over a long period of time. Funds like RenTech or Bridgewater.

throwawaymath 8y ago

If you cite a few of the specific studies you're talking about, I'll be happy to explain why they're either 1) not actually concluding what you think they're concluding, or 2) simply incorrect. I can tell you very confidently that there is no academic consensus claiming alpha does not exist. It's rather the contrary, actually, and it's far more nuanced than your comment implies. Outside of academic finance you can also find pretty obvious indications that alpna exists. Berkshire Hathaway has averaged about a 20% return between 1964 and 2018. Over the same timespan the S&P 500 averaged about a 7% annual return. Smaller funds have done even better than that. When you actually do the math on some of these firms' performance, you see that the likelihood of their returns emerging by chance is too small to be explained by the number of hedge funds that has ever existed. There are funds which haven't lost money for 20 - 30 years, and whose returns are multiples of the market over the same time.

FabHK 8y ago
The question is not only whether alpha exists, though, but whether you can a) identify it, and b) access it. Berkshire Hathaway’s stellar outperformance seems to have declined in recent years, right, and you and I can’t invest in Renaissance’s Medallion fund. I’d concur that the individual investor has much more freedom in terms of basic asset allocation than most professional fund managers (except maybe hedge funds), but otherwise the general advice to go for a broad based index fund still stands.