4 ms·

The difference is that on a long enough time horizon the best poker players clearly beat the averages. On a long enough time horizon, individual stock pickers

The difference is that on a long enough time horizon the best poker players clearly beat the averages. On a long enough time horizon, individual stock pickers very very rarely beat the market as a whole to the point where its hard to argue what they've done is skill and not blind luck.

WJW 5y ago
The usual counterpoint to this is the essay "The Superinvestors of Graham-and-Doddsville": https://www8.gsb.columbia.edu/articles/columbia-business/superinvestors https://www8.gsb.columbia.edu/articles/columbia-business/sup... TLDR: If it was really blind luck, you would expect the people who beat the market to come from a wide variety of stock picking philosophies. Ie, some technical analysts, some fundamental value investors, some momentum traders, some "throw a dart at the newspaper" people, some sector investors, etc etc etc. However, if you look at the investors who have consistently beat the market over many years it turns out that the majority of them came from a single school. The statistical chances of that happening as a result of pure chance are so small that the alternative hypothesis (ie those investors actually do have an edge, like good poker players) becomes very likely indeed.
- throw0101a 5y ago
  There's a few layers to this. If you want higher than market (average) returns, there are known factors that you invest in that have higher expected (but not guaranteed) returns: * https://en.wikipedia.org/wiki/Fama–French_three-factor_model https://en.wikipedia.org/wiki/Fama–French_three-factor_model Buffett's historical success has been quantified in light of this: * https://www.aqr.com/Insights/Research/Journal-Article/Buffetts-Alpha https://www.aqr.com/Insights/Research/Journal-Article/Buffet... * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3197185 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3197185 Also worth noting that Benjamin Graham, in his very last published interview (Financial Analysts Journal, 1976), stated: > In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors. * https://valuehunter.files.wordpress.com/2009/05/conversation-ben-graham.pdf https://valuehunter.files.wordpress.com/2009/05/conversation... Now there are lots of folks that don't bother listening to his advice, and take an active role in the market. But empirical studies have shown that, generally speaking, the more active a person is the worse their results tend to be. We've know this for at least fifty years: * https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street And even the professional folks who spend their working life generally get it wrong: * https://www.ifa.com/articles/despite_brief_reprieve_2018_spiva_report_reveals_active_funds_fail_dent_indexing_lead_-_works/ https://www.ifa.com/articles/despite_brief_reprieve_2018_spi... Over the course of 20+ years of investing, you're more likely (>85%) to make more money by simply buying passive funds that follow major indexes (S&P 500, Russell 3000, MSCI EAFE), why bother with the extra risk? Is the extra potential (not guaranteed) return really needed to meet your financial goals? If you can (e.g.) retire comfortably getting 'only' 6% returns, why bother chasing (say) 8-9%? Having more money isn't necessarily a bad thing, but what are you trading-off chasing for it? The odds are not on your side if you think that you're one of the folks that can beat the market, especially over a time period of 20-30 saving for retirement (and then 20-30 years in retirement). The extra returns are generally not 'free': you're taking extra risk for them. Of course one often hears about the 'superinvestors' that made it, but what about the (probably many more) people that did not: * https://xkcd.com/1827/ https://xkcd.com/1827/ As for luck versus skill, this has been studied: > When we turn to individual funds, the challenge is to distinguish skill from luck. With 3,156 funds in our full ($5 million AUM) sample, some do extraor- dinarily well and some do extraordinarily poorly just by chance. To distinguish between luck and skill, we compare the distribution of t(α) estimates from ac- tual fund returns with the distribution from bootstrap simulations in which all funds have zero true α. The tests on net returns say that few funds have enough skill to cover costs. The distribution of three-factor t(α) estimates from net fund returns is almost always to the left of the zero α distribution. The extreme right tail of the three-factor t(α) estimates for net fund returns, however, is roughly in line with the simulated distribution. This suggests that some managers do have sufficient skill to cover costs. But the estimate of net return three-factor true α is about zero even for the portfolio of funds in the top percentiles of historical three-factor t(α) estimates, and the estimate of four-factor true α is negative. Moreover, the estimate of true α for funds in the top percentiles is no better than the estimated α (also near zero) for large, efficiently managed passive funds. * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1356021 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1356021 * https://mba.tuck.dartmouth.edu/bespeneckbo/default/AFA611-Eckbo%20web%20site/AFA611-S8C-FamaFrench-LuckvSkill-JF10.pdf https://mba.tuck.dartmouth.edu/bespeneckbo/default/AFA611-Ec... Basically: the larger the portfolio, the more skill you need to beat the market (especially on a risk-adjusted basis) over time. Get 'too big' and you tend to run out of runway on your skill (at which point just go passive). This cross-over point is different for everyone, but you won't necessarily know where your's is ahead of time, and so initial (skilled) success may end unexpectedly and suddenly.
carnitine 5y ago
It’s very easy to argue rhetorically that it’s all luck, but the point does not stand up to any kind of rigour at all. Even if you make extremely conservative estimates, just one of the top funds is microscopically unlikely to arise via chance, let alone the multitude that do. Renaissance Technologies alone cannot be explained as random.

WJW 5y ago

The usual counterpoint to this is the essay "The Superinvestors of Graham-and-Doddsville": https://www8.gsb.columbia.edu/articles/columbia-business/superinvestors https://www8.gsb.columbia.edu/articles/columbia-business/sup... TLDR: If it was really blind luck, you would expect the people who beat the market to come from a wide variety of stock picking philosophies. Ie, some technical analysts, some fundamental value investors, some momentum traders, some "throw a dart at the newspaper" people, some sector investors, etc etc etc. However, if you look at the investors who have consistently beat the market over many years it turns out that the majority of them came from a single school. The statistical chances of that happening as a result of pure chance are so small that the alternative hypothesis (ie those investors actually do have an edge, like good poker players) becomes very likely indeed.

throw0101a 5y ago
There's a few layers to this. If you want higher than market (average) returns, there are known factors that you invest in that have higher expected (but not guaranteed) returns: * https://en.wikipedia.org/wiki/Fama–French_three-factor_model https://en.wikipedia.org/wiki/Fama–French_three-factor_model Buffett's historical success has been quantified in light of this: * https://www.aqr.com/Insights/Research/Journal-Article/Buffetts-Alpha https://www.aqr.com/Insights/Research/Journal-Article/Buffet... * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3197185 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3197185 Also worth noting that Benjamin Graham, in his very last published interview (Financial Analysts Journal, 1976), stated: > In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors. * https://valuehunter.files.wordpress.com/2009/05/conversation-ben-graham.pdf https://valuehunter.files.wordpress.com/2009/05/conversation... Now there are lots of folks that don't bother listening to his advice, and take an active role in the market. But empirical studies have shown that, generally speaking, the more active a person is the worse their results tend to be. We've know this for at least fifty years: * https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street And even the professional folks who spend their working life generally get it wrong: * https://www.ifa.com/articles/despite_brief_reprieve_2018_spiva_report_reveals_active_funds_fail_dent_indexing_lead_-_works/ https://www.ifa.com/articles/despite_brief_reprieve_2018_spi... Over the course of 20+ years of investing, you're more likely (>85%) to make more money by simply buying passive funds that follow major indexes (S&P 500, Russell 3000, MSCI EAFE), why bother with the extra risk? Is the extra potential (not guaranteed) return really needed to meet your financial goals? If you can (e.g.) retire comfortably getting 'only' 6% returns, why bother chasing (say) 8-9%? Having more money isn't necessarily a bad thing, but what are you trading-off chasing for it? The odds are not on your side if you think that you're one of the folks that can beat the market, especially over a time period of 20-30 saving for retirement (and then 20-30 years in retirement). The extra returns are generally not 'free': you're taking extra risk for them. Of course one often hears about the 'superinvestors' that made it, but what about the (probably many more) people that did not: * https://xkcd.com/1827/ https://xkcd.com/1827/ As for luck versus skill, this has been studied: > When we turn to individual funds, the challenge is to distinguish skill from luck. With 3,156 funds in our full ($5 million AUM) sample, some do extraor- dinarily well and some do extraordinarily poorly just by chance. To distinguish between luck and skill, we compare the distribution of t(α) estimates from ac- tual fund returns with the distribution from bootstrap simulations in which all funds have zero true α. The tests on net returns say that few funds have enough skill to cover costs. The distribution of three-factor t(α) estimates from net fund returns is almost always to the left of the zero α distribution. The extreme right tail of the three-factor t(α) estimates for net fund returns, however, is roughly in line with the simulated distribution. This suggests that some managers do have sufficient skill to cover costs. But the estimate of net return three-factor true α is about zero even for the portfolio of funds in the top percentiles of historical three-factor t(α) estimates, and the estimate of four-factor true α is negative. Moreover, the estimate of true α for funds in the top percentiles is no better than the estimated α (also near zero) for large, efficiently managed passive funds. * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1356021 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1356021 * https://mba.tuck.dartmouth.edu/bespeneckbo/default/AFA611-Eckbo%20web%20site/AFA611-S8C-FamaFrench-LuckvSkill-JF10.pdf https://mba.tuck.dartmouth.edu/bespeneckbo/default/AFA611-Ec... Basically: the larger the portfolio, the more skill you need to beat the market (especially on a risk-adjusted basis) over time. Get 'too big' and you tend to run out of runway on your skill (at which point just go passive). This cross-over point is different for everyone, but you won't necessarily know where your's is ahead of time, and so initial (skilled) success may end unexpectedly and suddenly.

carnitine 5y ago

It’s very easy to argue rhetorically that it’s all luck, but the point does not stand up to any kind of rigour at all. Even if you make extremely conservative estimates, just one of the top funds is microscopically unlikely to arise via chance, let alone the multitude that do. Renaissance Technologies alone cannot be explained as random.