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Do Stocks Outperform Treasury Bills? (2018)
- ZeljkoS 7y agoFollowup paper "Do Global Stocks Outperform US Treasury Bills?": https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3415739 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3415739
- countryqt30 7y agoNote how this is about GLOBAL stocks, not US Stocks, which would be the better comparison
- nabla9 7y agoThis is the second reason why indexing outperforms actively managed funds over the long term (The first reason is the fees). Price weighed index fund rebalances regularly and never misses out those best-performing four percent. Actively managed fund manager might do a good job valuing companies and might catch some success stories, but it's unlikely that they catch them all consistently.
- digianarchist 7y agoIsn't there only a handful of hedge funds that have posted profits every year of operation?
- nradov 7y agoYes but most of us aren't allowed to invest in them.
- iamlucaswolf 7y agoI don't pretend to know the numbers, but my guess is that Survivorship Bias might account for that to a substantial amount. I just can't imagine that there are people with glass bowls that good to make consistent alpha over the long term.
- Scoundreller 7y agoIn my dreams, I create 1024 stock-recommending twitter bots. If half beat the market in a year and half don’t, i’ll Still have one that goes up every year after 10 years, and sell it for a fortune.
- Majromax 7y ago> If half beat the market in a year and half don’t As per this article, that wouldn't happen: more than half of the bots would fail to beat the market. This article finds that the vast majority of the positive return is explained by relatively few stocks, leading to a positive skewness. The median random choice has a below-mean outcome.
- Scoundreller 7y agoRight. Regression toward the mean is inevitable. But I think people appreciate a story about picking the right stock more than the right stocks, which helps that problem.
- lonelappde 7y agoPlease read Paulos's classic book Innumeracy, on its 30th anniversary https://math.temple.edu/~paulos/oldsite/scam.html https://math.temple.edu/~paulos/oldsite/scam.html
- deleted 7y ago[deleted]
- johnrgrace 7y agoALmost all have posted profits, only a very few have posted profits higher than their risk adjusted peers.
- topmonk 7y agoWhen companies have now started to go into debt to buyback shares and artificially raise their EPS, who are they targeting? The people who are actively evaluating what they're buying, or those asleep at the wheel buying index funds? Index funds might have been a good investment in the past, before wallstreet has figured out how to exploit it like they're doing today.
- buttcoinslol 7y ago> When companies have now started to go into debt to buyback shares and artificially raise their EPS, who are they targeting? Their shareholders, which includes management. Buybacks are essentially dividends in another form. Buybacks have the upside of not being expected to go up indefinitely, and there are no dividend cuts to upset investors.
- topmonk 7y agoWhy does everyone ignore the second part of my point? Corporations are going into record debt to do this. It is one thing to pay back shareholders by a dividend or buyback or whatever, if the company has extra profits, but it is quite another to borrow money to do it. That works for now, but as soon as those interest rates tick up...
- buttcoinslol 7y agoMoney is extremely cheap to borrow, and companies have decided the interest rate risk is lower than the short-term share price gains from borrowing money to do buybacks. Perhaps current management assumes they won't be the ones left holding the bag. I agree with you, when rates go up a large amount of zombie companies being held up by cheap money are going to go bankrupt, and it will have large ripple effects.
- glofish 7y agoFrom what I understand this exact same argument is reiterated every decade. "It worked in the past but today is different" - invariably ending up with a suggestion to give up increasingly large amounts of your profits to someone that "manages your investments" for you. I would do it if the fees were fixed, once someone asks for a "percent" I call BS. There is no difference between managing 100K and 1M yet you pay 10 times more. I'll stick with Vanguard.
- PorterDuff 7y ago" indexing outperforms actively managed funds" Most index funds are actively managed.
- buttcoinslol 7y agoSeeking to replicate the performance of an index by trading a basket of stocks/futures/options is not active management. For instance, when an institutional investor gives SPDR say, $300,000,000 for a million shares of SPY, the fund goes out at purchases the underlying stocks in proportions that match the composition of the S&P 500, and then issues the SPY shares and holds the underlying and dividend payments in trust. SPDR does not have the option to choose the shares, they purchase a basket that replicates the S&P 500. This is passive management, there is no one actively picking stocks, and when to buy/sell them.
- PorterDuff 7y agoSo who decides what the DJIA and S&P 500 stocks actually are? A random number generator?
- buttcoinslol 7y agoI will assume your interest is genuine, here are links to the documents explaining the methodology behind the various S&P[0] and DJ indices[1]. I'm sure you can find documents for /RUT and IWM (Russell 2000), as well as /NQ and QQQ (Nasdaq 100) if you would like to see those as well. [0]https://us.spindices.com/documents/methodologies/methodology-sp-us-indices.pdf https://us.spindices.com/documents/methodologies/methodology... [1]https://us.spindices.com/documents/methodologies/methodology-dj-averages.pdf https://us.spindices.com/documents/methodologies/methodology...
- navigatesol 7y agoThe point, with which I agree, is that it's still active, just much less so. It's a bit pedantic, but assuming ETFs are passive by definition could get people crushed when these themed tickers get outflows.
- acjohnson55 7y agoDoes this have any implication for indexing criteria?
- H8crilA 7y agoDo we really need a paper for something that takes 5 seconds to backtest? https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=1&timePeriod=4&startYear=1972&firstMonth=1&endYear=2019&lastMonth=12&calendarAligned=true&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&benchmark=VFINX&asset1=LongTreasury&allocation1_1=100&asset2=IntermediateTreasury&allocation2_2=100&asset3=ShortTreasury&allocation3_3=100&total1=100&total2=100&total3=100 https://www.portfoliovisualizer.com/backtest-asset-class-all...
- RichardHeart 7y agoGLOBAL stocks. You linked to the Vanguard 500 index which is US only companies.
- wcoenen 7y agoI tried to use ishares MSCI ACWI as the benchmark, but apparently that only goes back to 2009. (Not that the paper is trying to do something like that. It is more about the performance problems of individual stocks. It is not claiming that treasuries outperform a stock market index.)
- H8crilA 7y agoI leave it as an exercise to you to select "global stocks" as one of the tested portfolios ...
- freddie_mercury 7y agoYour backtest doesn't address anything that the paper covers and seems completely unrelated. It feel like you read the headline on HN and assumed you knew what the paper was about. Here's the beginning of the abstract, which only takes four or five seconds to read: "The majority of common stocks that have appeared in the Center for Research in Security Prices (CRSP) database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the best-performing 4% of listed companies explain the net gain for the entire US stock market since 1926, as other stocks collectively matched Treasury bills." What part of that does your 5 second backtest show?
- RichardHeart 7y agoPlease note that this is GLOBAL stocks.
- benj111 7y agoThis isnt really surprising to me. What's the average lifetime of a company, even one that has reached maturity? I would guess much less than 100 years. I suppose the waters are muddied somewhat by consolidation, in 1927 there were 10s(?) of thousands of car companies, today we're basically down to 20(?). No doubt many went bust, but many also got subsumed. The fact that 3/7 companies have outperformed Treasuries since 1927 is the surprising thing for me, not that 4/7 havent.
- pletnes 7y agoThis is a very valid point. You should include now-defunct companies, as current investors can’t tell whether a company goes bankrupt next year.
- freddie_mercury 7y agoThe study does include now-defunct companies.
- countryqt30 7y agoMake it even more extreme. I bet that the Treasuries would also outperform if you take 10'000 year timespan. Simply because: Which company would really survive 10'000 years, huh? So the total return would be 0. And as long as Treasuries>0, that research paper is little more than a fairly obvious statement, at best.
- lonelappde 7y agoWhat government survives 10K years?
- freddie_mercury 7y agoWhat does the average lifetime of a company have to do with it? I'm not really understanding why you think that is relevant to what the paper is discussing? The paper isn't comparing "Company A that was in existence from 1926-1944" vs. "Treasury Bills from 1926-2018". It is comparing "Company A from 1926-1944" vs. "Treasury Bills from 1926-1944". So the average lifetime of a company is irrelevant. I also don't follow why you think the waters are muddied by consolidation? The paper explicitly discusses how it handles "merger, exchange, or liquidation (CRSP DLSTCD with 2, 3, or 4 as first digit)". If Company B is founded in 1931 and merges with another in 1943 then its lifetime is 1931-1943 and it is compared against Treasury bills over that period, so there's nothing muddied.
- lixtra 7y agoA little bit OT: did anybody come up with a way to graph two stocks such that you see individual long term performance but also relative performance? I.e. you can plot them on different scales, so that they both start at the same position. Then you easily see which stock outperformed. But what if you want to see when it was a good time to switch as well?
- nycdatasci2 7y agoYou could potentially plot spread like this: http://archive.nytimes.com/www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html http://archive.nytimes.com/www.nytimes.com/interactive/2011/...
- freddie_mercury 7y agoIt sounds like you are talking about a "price relative" or "relative strength" or "Bogle tell tale" chart.
- deleted 7y ago[deleted]
- FakeComments 7y agoYou plot them as ROI or other normalized value, eg by dividing the price of the stock by its initial value. Then you can compare two stocks by looking at their return at T1 relative to their price at T0. This solves the problem that you’re better off investing in a $5 stock going to $10 than a $100 stock going to $115, since it normalizes it to 1 going to 2 and 1 going to 1.15 respectively. For switching you may need something more complicated, like looking at the price at Tn divide by the price at Tn-1.
- kgwgk 7y agoUse a log scale, it makes easier to compare the performance in different periods and the spread between the two lines gives you the relative performance (when both stocks have the same performance the lines move in parallel, when the spread widens the upper line is performing better and vice versa).
- countryqt30 7y agoWhy not compare Philippine Treasuries and US Stocks next? #1 rule in finance: use the correct benchmarks ;D
- kryptiskt 7y agoI'm not going to buy any bonds in the current environment: Swedish 3-month bills yield -0.5%, 10-year bonds yield -0.2%. Whatever the historical data says, I can't see anyone buying at those prices unless they have to.
- paulpauper 7y agoyeah but long term treasury and investment-grade medium duration corporate bonds are still yielding 2-4% . Ppl thought bonds were expensive in late 2018, and now in 2019 LQD, a bond etf, is up 15%.
- buttcoinslol 7y agoThere are a lot of entities with enormous sums of money who must buy quality debt at whatever yield is available, and they dwarf retail's appetite for bonds by several orders of magnitude
- BukhariH 7y agoWell, if you’re a US based investor then it might not be a bad idea to pick up some of those -0.5% yield bonds when you consider the effect of currency hedging. Conversely, for EUR based fund managers you’ll likely be better of sticking to negative yielding EUR denominated bonds vs treasuries. Source: https://www.forbes.com/sites/vineerbhansali/2019/06/17/trading-sardines-the-case-of-currency-hedged-negative-yielding-bonds/ https://www.forbes.com/sites/vineerbhansali/2019/06/17/tradi... https://www.ft.com/content/85c56472-bdcb-11e9-b350-db00d509634e https://www.ft.com/content/85c56472-bdcb-11e9-b350-db00d5096...
- gigatexal 7y agoAnd who is the author? A graduate student?