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Berkshire Hathaway has beaten the market over the last 5 year. They're basically a mutual fund combined with a private equity firm. But it seems like the crite

Berkshire Hathaway has beaten the market over the last 5 year. They're basically a mutual fund combined with a private equity firm. But it seems like the criteria used is a bit weird: > The team selected the 25 percent of the funds with the best performance over the 12 months through June 2018. Then the analysts asked how many of those funds remained in the top quarter for the four succeeding 12-month periods through June 2022. That's different than not beating the market. > And over a full 20-year period ending last December, fewer than 10 percent of active U.S. stock funds managed to beat their benchmarks. So some firms do beat the market.

maxbond 4y ago
If some firms beat their benchmarks, but no firm is consistently in the top bracket, don't you think that suggests it's noise?
- halpmeh 4y ago
  They say later on that some firms do beat their benchmark over a 20 year period, so I don't think it's just noise.
  - maxbond 4y ago
    You mean this part? > Some actively managed funds did better than the overall market over the last 15 or 20 years. Though they were unable to do so consistently year after year, they had good stretches, and those periods were strong enough to make them outperform over the entire span. Such funds may well be worth owning. > “Those that have managed to do that are impressive,” Mr. Edwards said. “But which funds will be able to do it over the next 20 years?” Unfortunately, we don’t know. If you owned that fund for 20 years you'd beat the benchmark. If you missed a few crucial moments - you wouldn't. It's really easy to get into the fund after a good year and leave after a bad year. The risk required for those big gains also sometimes results in big losses. Other times funds cheat, like Renaissance. They certainly had lots of quantitative innovations, but a huge part of their advantage was not paying their taxes. They settled with the IRS for 7 billion dollars. For the record, I don't think literally all funds doing well is noise, but the evidence seems to consistently bear out that most of the time it is.
    - SideQuark 4y ago
      >but a huge part of their advantage was not paying their taxes. They settled with the IRS for 7 billion dollars. And that 7B is past taxes, interest, and penalties. They returned 66% annualized before fees and 39% after fees over a 30 year span, 1988 to 2018. Renaissance also has grown to over $130B. It also was not tied to many of their funds - it was only from (if I recall) a single fund. The others are not under IRS investigation (AFAIK) So the 7B is no where near enough of a cheat to allow this kind of return. You can view the 7B as evidence that the fun returned incredible returns to investors, so much so, that missed taxes on the profits were 7B.
      - maxbond 4y ago
        It was a $7B settlement, not that they failed to pay $7B dollars in taxes. Presumably they failed to pay much more than that. I don't know how much, I doubt it would be possible to calculate. But please correct me if this is known. ETA: > Levin in 2014 had presented the findings of a year-long probe into basket options, calling for tougher action from the authorities. The report said the largest user of the options, Renaissance Technologies Corp, saved an estimated $6.8 billion in taxes. https://www.reuters.com/business/finance/renaissance-executives-pay-about-7-bln-settle-tax-probe-wsj-2021-09-02/ https://www.reuters.com/business/finance/renaissance-executi... http://web.archive.org/web/20211226110616/https://www.reuters.com/business/finance/renaissance-executives-pay-about-7-bln-settle-tax-probe-wsj-2021-09-02/ http://web.archive.org/web/20211226110616/https://www.reuter... I kinda doubt that this could be accurately assessed by Levin (since the entire point was to add smoke and mirrors to thr ese transactions), but I'll concede that the best available evidence (at least after casual searching) suggests it was about $7B (in 2014). I don't really doubt that there was something to Renaissance's magic, but going by your numbers, nearly half of that magic was tax fraud. If your competitors are paying multiples more than you in taxes, because they're paying short term capital gains and you only pay long term - yeah, having the highest returns seems pretty feasible. I'd also note that "one fund" was their main fund, not like a little side project or something. Lastly I'd like to point out this linear, it's not like they would have returned 39% in a universe where they paid that $7B as that went instead of as a lump sum at the end. They basically were drawing on a line of credit from the taxpayer. They had additional liquidity and so they made additional money. You can't separate their tax fraud from their returns and say that their returns were just so good that they had a huge tax bill. No, they committed tax fraud, in order to get those returns.
mitt_romney_12 4y ago
In an interesting side note, even Warren Buffet (the manager of Berkshire Hathaway) is a proponent of index funds. He made a $1 million bet in 2008 that and index fund tracking the S&P 500 could beat a hedge fund portfolio over the next 10 years, which he ended up winning in 2017. Source: https://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-funds-year-eight-brka-brkb.asp https://www.investopedia.com/articles/investing/030916/buffe...
Dylan16807 4y ago
It's really easy to have funds that beat the market over X years if you only measure them once at the end. Here's a trivial recipe: Gamble 20% of the money on a single roulette spin. Then invest everything in the overall market. (Yeah, technically you want the closest stock equivalent.) The challenge is to consistently beat the market. To prove you didn't just get lucky on a handful of bets. For that, the criteria isn't weird at all. They're checking if a series of bets on a fund would have mostly or all been successful.
- halpmeh 4y ago
  That’s not a good example because the expected value of your returns is less than the market returns. Only rubes would invest in such a scheme. A better example would be to create the S&P 499. Take the S&P 500 and remove one company you think most likely to underperform. Theoretically you’d outperform the S&P 500. In the short term, I think you’re right. However, 20 years is a really long time. You’re not going to make a bet at year 18 and somehow magically make back 15 years of gains.
  - Dylan16807 4y ago
    > That’s not a good example because the expected value of your returns is less than the market returns. Only rubes would invest in such a scheme. So take the same odds except you pick stocks in a way that you believe you'll beat the market. Nobody knows the actual odds upfront. And there's plenty of money going to funds that don't pan out. > You’re not going to make a bet at year 18 and somehow magically make back 15 years of gains. That depends on how much your portfolio stands out. If you're .1% worse than the market for 15 years and then you make a bet that gains you 2.5%, you just beat the market.
    - halpmeh 4y ago
      My point was that your example shouldn't have provable negative expected value. Feel free to use the S&P 499 example in the future. And look, I agree that indexed investing is likely the best strategy for most people. However, some people do beat the market consistently over the long term. TFA states that plainly, although it tries to downplay it. Additionally, this specific "research" is released by S&P Dow Jones Indices. What is the S&P 500 and Dow Jones if not a hand-picked selection of stocks? So this article isn't really saying it's impossible to beat the market. The article is saying that it's impossible to beat S&P Dow Jones Indices at picking stocks, which means the article is just a marketing piece. I'll also add that the S&P 500 plays with a stacked deck. By the nature of its size, companies included in the index trade at a substantial premium to similar companies outside of the index.

maxbond 4y ago

If some firms beat their benchmarks, but no firm is consistently in the top bracket, don't you think that suggests it's noise?

halpmeh 4y ago
They say later on that some firms do beat their benchmark over a 20 year period, so I don't think it's just noise.
- maxbond 4y ago
  You mean this part? > Some actively managed funds did better than the overall market over the last 15 or 20 years. Though they were unable to do so consistently year after year, they had good stretches, and those periods were strong enough to make them outperform over the entire span. Such funds may well be worth owning. > “Those that have managed to do that are impressive,” Mr. Edwards said. “But which funds will be able to do it over the next 20 years?” Unfortunately, we don’t know. If you owned that fund for 20 years you'd beat the benchmark. If you missed a few crucial moments - you wouldn't. It's really easy to get into the fund after a good year and leave after a bad year. The risk required for those big gains also sometimes results in big losses. Other times funds cheat, like Renaissance. They certainly had lots of quantitative innovations, but a huge part of their advantage was not paying their taxes. They settled with the IRS for 7 billion dollars. For the record, I don't think literally all funds doing well is noise, but the evidence seems to consistently bear out that most of the time it is.
  - SideQuark 4y ago
    >but a huge part of their advantage was not paying their taxes. They settled with the IRS for 7 billion dollars. And that 7B is past taxes, interest, and penalties. They returned 66% annualized before fees and 39% after fees over a 30 year span, 1988 to 2018. Renaissance also has grown to over $130B. It also was not tied to many of their funds - it was only from (if I recall) a single fund. The others are not under IRS investigation (AFAIK) So the 7B is no where near enough of a cheat to allow this kind of return. You can view the 7B as evidence that the fun returned incredible returns to investors, so much so, that missed taxes on the profits were 7B.
    - maxbond 4y ago
      It was a $7B settlement, not that they failed to pay $7B dollars in taxes. Presumably they failed to pay much more than that. I don't know how much, I doubt it would be possible to calculate. But please correct me if this is known. ETA: > Levin in 2014 had presented the findings of a year-long probe into basket options, calling for tougher action from the authorities. The report said the largest user of the options, Renaissance Technologies Corp, saved an estimated $6.8 billion in taxes. https://www.reuters.com/business/finance/renaissance-executives-pay-about-7-bln-settle-tax-probe-wsj-2021-09-02/ https://www.reuters.com/business/finance/renaissance-executi... http://web.archive.org/web/20211226110616/https://www.reuters.com/business/finance/renaissance-executives-pay-about-7-bln-settle-tax-probe-wsj-2021-09-02/ http://web.archive.org/web/20211226110616/https://www.reuter... I kinda doubt that this could be accurately assessed by Levin (since the entire point was to add smoke and mirrors to thr ese transactions), but I'll concede that the best available evidence (at least after casual searching) suggests it was about $7B (in 2014). I don't really doubt that there was something to Renaissance's magic, but going by your numbers, nearly half of that magic was tax fraud. If your competitors are paying multiples more than you in taxes, because they're paying short term capital gains and you only pay long term - yeah, having the highest returns seems pretty feasible. I'd also note that "one fund" was their main fund, not like a little side project or something. Lastly I'd like to point out this linear, it's not like they would have returned 39% in a universe where they paid that $7B as that went instead of as a lump sum at the end. They basically were drawing on a line of credit from the taxpayer. They had additional liquidity and so they made additional money. You can't separate their tax fraud from their returns and say that their returns were just so good that they had a huge tax bill. No, they committed tax fraud, in order to get those returns.

mitt_romney_12 4y ago

In an interesting side note, even Warren Buffet (the manager of Berkshire Hathaway) is a proponent of index funds. He made a $1 million bet in 2008 that and index fund tracking the S&P 500 could beat a hedge fund portfolio over the next 10 years, which he ended up winning in 2017. Source: https://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-funds-year-eight-brka-brkb.asp https://www.investopedia.com/articles/investing/030916/buffe...

Dylan16807 4y ago

It's really easy to have funds that beat the market over X years if you only measure them once at the end. Here's a trivial recipe: Gamble 20% of the money on a single roulette spin. Then invest everything in the overall market. (Yeah, technically you want the closest stock equivalent.) The challenge is to consistently beat the market. To prove you didn't just get lucky on a handful of bets. For that, the criteria isn't weird at all. They're checking if a series of bets on a fund would have mostly or all been successful.

halpmeh 4y ago
That’s not a good example because the expected value of your returns is less than the market returns. Only rubes would invest in such a scheme. A better example would be to create the S&P 499. Take the S&P 500 and remove one company you think most likely to underperform. Theoretically you’d outperform the S&P 500. In the short term, I think you’re right. However, 20 years is a really long time. You’re not going to make a bet at year 18 and somehow magically make back 15 years of gains.
- Dylan16807 4y ago
  > That’s not a good example because the expected value of your returns is less than the market returns. Only rubes would invest in such a scheme. So take the same odds except you pick stocks in a way that you believe you'll beat the market. Nobody knows the actual odds upfront. And there's plenty of money going to funds that don't pan out. > You’re not going to make a bet at year 18 and somehow magically make back 15 years of gains. That depends on how much your portfolio stands out. If you're .1% worse than the market for 15 years and then you make a bet that gains you 2.5%, you just beat the market.
  - halpmeh 4y ago
    My point was that your example shouldn't have provable negative expected value. Feel free to use the S&P 499 example in the future. And look, I agree that indexed investing is likely the best strategy for most people. However, some people do beat the market consistently over the long term. TFA states that plainly, although it tries to downplay it. Additionally, this specific "research" is released by S&P Dow Jones Indices. What is the S&P 500 and Dow Jones if not a hand-picked selection of stocks? So this article isn't really saying it's impossible to beat the market. The article is saying that it's impossible to beat S&P Dow Jones Indices at picking stocks, which means the article is just a marketing piece. I'll also add that the S&P 500 plays with a stacked deck. By the nature of its size, companies included in the index trade at a substantial premium to similar companies outside of the index.