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There are some people who can beat the market. Vanguard owes it's success as much to John Neff, who ran the Vanguard Windsor Fund and consistently out performe

by zhdc1 6y ago

There are some people who can beat the market. Vanguard owes it's success as much to John Neff, who ran the Vanguard Windsor Fund and consistently out performed the S&P500 by ~3% a year for almost thirty years, as it does to John Bogle, who founded Vanguard and popularized index investing. However, there are very few people who can do this over a long period of time, which (fees and taxes aside) is one of the main reasons for going with index funds.

lazide 6y ago
It's also really hard to pick 'can beat the market' (predictive of future behavior), from 'have beat the market' (retrospective analysis of results - what all it's associated survivorship biases and bias towards success in a past which will never repeat itself exactly. Someone WILL always beat the market. A small set of people WILL beat the market consistently - until they don't. That set gets smaller every year, until over a long enough timeframe it goes to zero. History has shown predicting who will be able to win over a specific timeframe is essentially impossible, and more random chance than skill - with temporary counter examples that always revert to the mean over time.
- deleted 6y ago
  [deleted]
- fractionalhare 6y ago
  History has not shown that. It is easy to say that people beat the market by chance, but you should actually try calculating how many standard deviations from the mean some of these track records are. There haven't been anywhere nearly enough hedge funds to justify the most consistent track records being due to chance alone. For illustration: assume any given fund has returns which simply approximate a normal distribution; i.e. their returns are theoretically just noise. Then the chance of the fund achieving a 2 sigma return in any given year is about 2%. We can model the odds of such a firm consistently exhibiting a 2 sigma return for 20 years in a row using a binomial distribution with n = 20 trials, k = 20 successes and success probability p = 0.02. Then we have binom(20, 20) * 0.02^20 * 0.8^0 = 1x10^-34 There are firms which have consistently beaten the market by a significant margin for that long. Even if you relax the constraint to 10 years, you still get "only" 1x10^-17. At a certain point this becomes similar to saying that Steph Curry isn't actually good at basketball, all of his 3 point throws are just the expected outcome of lots of mediocre players existing who didn't make it to the NBA. I do agree that retail investors should just invest in index funds though. And I agree it's extremely difficult to determine who has the genuine skill to beat the market before they've beaten it for so long that they're no longer accepting money.
  - lazide 6y ago
    If you include their costs and fees, that is not the case though is it? Or at least the data I've been able to find doesn't support that. You're also talking about rearward looking data, not forward looking predictability, often only including hedge funds for instance that still exist today. For any given hedgefund who outperformed in the past, how likely is it that, if you made a judgement today on their ability to perform, and then waited 1, 5, 10 years in the future, it would match that judgement? What are the odds they'll exist then, or be merged or renamed or whatever? If you today made a bet for 10 years from now as to Steph Curry's 3 point average then, how likely would it be to win? There is a reason anything to do with the markets is almost always followed with 'past performance is no guarantee of future results'. There are also confounding effects like the Bernie Madoff's and Enron's of the world, and major issues with visibility into most hedge funds that make it difficult to actually compared performance on a level playing field. If someone is 'loading the die' using insider trading, tips from the CIA or whatever, it would be really difficult to call them anything but incredibly skilled/lucky - and you couldn't tell the difference unless it blew up publicly.
    - fractionalhare 6y ago
      Like I said, I agree that it's extremely hard to judge if someone has genuine ability before they exhibit the track record. I'm simply saying that once the track record is established, attributing it to chance alone doesn't really make sense mathematically speaking.
      - lazide 6y ago
        Thanks for doing the math! It would be fun to really really look into this. Run some controlled experiments (alas no multi universe engine to do that correctly), deep dive into what each fund actually does to find positive or negative correlations, etc. It would be interesting for instance to do back testing on many of these things - if someone is declared a ‘winner’, vs not declared a winner (but doing the same things), is the likelyhood the winning streak holds up greater or lesser? Does a large amount under investment change odds of success? (Big pockets make it easier to win?) Does a change in amount under investment change odds of success? (People flock to perceived winners, both investors and opportunities, increasing their odds of success)
mattnewton 6y ago
It depends on what your definition of beating the market is, and how much you are investing. It’s probably much easier for me with my tiny net worth to beat it consistently than the funds of the two John’s you mentioned. If your definition is SP500, a retail investor could have just bought a Nasdaq100 basket and crushed “the market” over almost all of the last 5 years.
- Youden 6y ago
  The normal definition of "beat the market" is to achieve greater *risk-adjusted* returns. It's no secret or controversy that higher risk means higher returns, that's generally accepted as a given.

by zhdc1 6y ago

lazide 6y ago

It's also really hard to pick 'can beat the market' (predictive of future behavior), from 'have beat the market' (retrospective analysis of results - what all it's associated survivorship biases and bias towards success in a past which will never repeat itself exactly. Someone WILL always beat the market. A small set of people WILL beat the market consistently - until they don't. That set gets smaller every year, until over a long enough timeframe it goes to zero. History has shown predicting who will be able to win over a specific timeframe is essentially impossible, and more random chance than skill - with temporary counter examples that always revert to the mean over time.

deleted 6y ago
[deleted]
fractionalhare 6y ago
History has not shown that. It is easy to say that people beat the market by chance, but you should actually try calculating how many standard deviations from the mean some of these track records are. There haven't been anywhere nearly enough hedge funds to justify the most consistent track records being due to chance alone. For illustration: assume any given fund has returns which simply approximate a normal distribution; i.e. their returns are theoretically just noise. Then the chance of the fund achieving a 2 sigma return in any given year is about 2%. We can model the odds of such a firm consistently exhibiting a 2 sigma return for 20 years in a row using a binomial distribution with n = 20 trials, k = 20 successes and success probability p = 0.02. Then we have binom(20, 20) * 0.02^20 * 0.8^0 = 1x10^-34 There are firms which have consistently beaten the market by a significant margin for that long. Even if you relax the constraint to 10 years, you still get "only" 1x10^-17. At a certain point this becomes similar to saying that Steph Curry isn't actually good at basketball, all of his 3 point throws are just the expected outcome of lots of mediocre players existing who didn't make it to the NBA. I do agree that retail investors should just invest in index funds though. And I agree it's extremely difficult to determine who has the genuine skill to beat the market before they've beaten it for so long that they're no longer accepting money.
- lazide 6y ago
  If you include their costs and fees, that is not the case though is it? Or at least the data I've been able to find doesn't support that. You're also talking about rearward looking data, not forward looking predictability, often only including hedge funds for instance that still exist today. For any given hedgefund who outperformed in the past, how likely is it that, if you made a judgement today on their ability to perform, and then waited 1, 5, 10 years in the future, it would match that judgement? What are the odds they'll exist then, or be merged or renamed or whatever? If you today made a bet for 10 years from now as to Steph Curry's 3 point average then, how likely would it be to win? There is a reason anything to do with the markets is almost always followed with 'past performance is no guarantee of future results'. There are also confounding effects like the Bernie Madoff's and Enron's of the world, and major issues with visibility into most hedge funds that make it difficult to actually compared performance on a level playing field. If someone is 'loading the die' using insider trading, tips from the CIA or whatever, it would be really difficult to call them anything but incredibly skilled/lucky - and you couldn't tell the difference unless it blew up publicly.
  - fractionalhare 6y ago
    Like I said, I agree that it's extremely hard to judge if someone has genuine ability before they exhibit the track record. I'm simply saying that once the track record is established, attributing it to chance alone doesn't really make sense mathematically speaking.
    - lazide 6y ago
      Thanks for doing the math! It would be fun to really really look into this. Run some controlled experiments (alas no multi universe engine to do that correctly), deep dive into what each fund actually does to find positive or negative correlations, etc. It would be interesting for instance to do back testing on many of these things - if someone is declared a ‘winner’, vs not declared a winner (but doing the same things), is the likelyhood the winning streak holds up greater or lesser? Does a large amount under investment change odds of success? (Big pockets make it easier to win?) Does a change in amount under investment change odds of success? (People flock to perceived winners, both investors and opportunities, increasing their odds of success)

mattnewton 6y ago

It depends on what your definition of beating the market is, and how much you are investing. It’s probably much easier for me with my tiny net worth to beat it consistently than the funds of the two John’s you mentioned. If your definition is SP500, a retail investor could have just bought a Nasdaq100 basket and crushed “the market” over almost all of the last 5 years.

Youden 6y ago
The normal definition of "beat the market" is to achieve greater *risk-adjusted* returns. It's no secret or controversy that higher risk means higher returns, that's generally accepted as a given.