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That's an entire discussion of its own. My point was that they're not all just lucky.

mattmaroon 18y ago
You can't prove that, and even if you could, you couldn't prove which ones weren't just lucky so the statement is useless.
- ryanwaggoner 18y ago
  Isn't the argument the same for any field? Can't we argue that successful practitioners in every field may have just gotten lucky, from entrepreneurship to science to anything else? Not being able to prove something empirically doesn't mean that it's automatically invalid, or that we should dismiss it as being unworthy of . People don't start companies because they can prove that they'll be successful, and people don't invest in companies because they can prove that they're going to succeed. They invest because they believe the odds of success are sufficiently high to justify the risk. In the same way, I don't think we've rediscovered that money management is pseudoscience just because most money managers fail to beat the market. That market is itself made up of people who are trying to beat each other, and statistically, most will fail and disappear. That doesn't mean that the market is a failure or that it's "pseudoscience".
  - comatose_kid 18y ago
    Not really - think about a heart surgeon's success rate vs. a money manager over the long term (20 years).
  - jimbokun 18y ago
    'That market is itself made up of people who are trying to beat each other, and statistically, most will fail and disappear. That doesn't mean that the market is a failure or that it's "pseudoscience".' The trouble is, you can come up with a pretty good approximation of a portfolio that reflects the "wisdom" of the broad market on your own. Pick one or a few diversified index funds, follow some guidelines to split up your portfolio between fixed income and equities (maybe add some real estate or commodities if you want to get fancy), and you're done. You might get some suggestions on the particulars of which index fund, or exact allocation percentages, from a money manager but that's not really adding much value. Maybe just a one time consultation. But what if you want to beat the market? Is there someone you can go to and be confident he or she has a good chance to succeed? Well, if such a person exists, you probably will not be able to identify him or her, except maybe if you know as much about money management as they do. Bernie Madoff is the perfect example here. The people who invested with him were not able to distinguish his pyramid scheme scam from a good investing scheme until it was too late. Some of his investors were supposedly pretty sophisticated in financial matters, too. So, you can get the average market return on your own, and you probably can't tell a good money manager from a bad one. That eliminates most of the reasons for employing a money manager, even if good ones exist.
    - ryanwaggoner 18y ago
      I'm firmly in the camp of index fund investing over picking individual stocks or money managers. Statistics will tell you that you're far better off just picking an index fund. But that doesn't make money management an invalid field or a pseudoscience. It just means that it's hard to differentiate between those with true skill and those who just got lucky. It seems like the same can be said for venture investing. How do you know which entrepreneurs will be successful? You don't, so you go off of their past performance, the market environment, the strength of their idea and their team, etc, etc. But you also go one step further and try to spread the risk across a portfolio of investments. Perhaps you should do the same with money managers? Pick the 10-20 at the top of the field and let them all manage a piece of your portfolio? Obvious problems here as well. On a related note, does this mean that venture funding is fundamentally flawed? That venture funds would be better off just putting their money in index funds? I have a hard time seeing that.
      - mattmaroon 18y ago
        It's not hard to differentiate between those who have true skill and those who got lucky, it's impossible. The variance is just too high. Hard implies that if you worked at it enough, you could somehow do it. You can't. And yes, venture funding is fundamentally flawed and the average VC firm underperforms the market. LPs as a whole would be better off with index funds. However, unlike with equities, you can get an edge in VC investing because results tend to perpetuate themselves. Remember, equities of non-public companies aren't priced by the market, so they aren't as efficient, and it's the efficiency of the market that makes beating it untenable. Also there's a tremendous deal of collusion in private equity that doesn't exist in public due to regulation. It's actually a mystery to me how they get away with much of what they do. The two types of investing aren't really comparable due to that. You could simply invest every year in the top few VC firms from the previous year and outperform the market for a long time that way. You cannot do this with hedge funds or mutual funds, or if you could, you and I would both not support the notion of just sticking it in ETFs.
  - deleted 18y ago
    [deleted]
  - mattmaroon 18y ago
    No, you really can't say that for almost any field. Money management and poker tournaments are about all I can come up with. In any competitive field with a quantifiable scoreboard, you could take the data, extract from it means and standard deviations, and say with x% certainty that one player is better than another. In money management, x is never very large. It's so small that you can't reliably say that anyone is better than anyone else, in fact the overall distribution of money managers isn't much different from what it would be if it were all chimpanzees selecting stocks with darts. In basketball or chess, x gets to pretty near 100.

You can't prove that, and even if you could, you couldn't prove which ones weren't just lucky so the statement is useless.

ryanwaggoner 18y ago
Isn't the argument the same for any field? Can't we argue that successful practitioners in every field may have just gotten lucky, from entrepreneurship to science to anything else? Not being able to prove something empirically doesn't mean that it's automatically invalid, or that we should dismiss it as being unworthy of . People don't start companies because they can prove that they'll be successful, and people don't invest in companies because they can prove that they're going to succeed. They invest because they believe the odds of success are sufficiently high to justify the risk. In the same way, I don't think we've rediscovered that money management is pseudoscience just because most money managers fail to beat the market. That market is itself made up of people who are trying to beat each other, and statistically, most will fail and disappear. That doesn't mean that the market is a failure or that it's "pseudoscience".
- comatose_kid 18y ago
  Not really - think about a heart surgeon's success rate vs. a money manager over the long term (20 years).
- jimbokun 18y ago
  'That market is itself made up of people who are trying to beat each other, and statistically, most will fail and disappear. That doesn't mean that the market is a failure or that it's "pseudoscience".' The trouble is, you can come up with a pretty good approximation of a portfolio that reflects the "wisdom" of the broad market on your own. Pick one or a few diversified index funds, follow some guidelines to split up your portfolio between fixed income and equities (maybe add some real estate or commodities if you want to get fancy), and you're done. You might get some suggestions on the particulars of which index fund, or exact allocation percentages, from a money manager but that's not really adding much value. Maybe just a one time consultation. But what if you want to beat the market? Is there someone you can go to and be confident he or she has a good chance to succeed? Well, if such a person exists, you probably will not be able to identify him or her, except maybe if you know as much about money management as they do. Bernie Madoff is the perfect example here. The people who invested with him were not able to distinguish his pyramid scheme scam from a good investing scheme until it was too late. Some of his investors were supposedly pretty sophisticated in financial matters, too. So, you can get the average market return on your own, and you probably can't tell a good money manager from a bad one. That eliminates most of the reasons for employing a money manager, even if good ones exist.
  - ryanwaggoner 18y ago
    I'm firmly in the camp of index fund investing over picking individual stocks or money managers. Statistics will tell you that you're far better off just picking an index fund. But that doesn't make money management an invalid field or a pseudoscience. It just means that it's hard to differentiate between those with true skill and those who just got lucky. It seems like the same can be said for venture investing. How do you know which entrepreneurs will be successful? You don't, so you go off of their past performance, the market environment, the strength of their idea and their team, etc, etc. But you also go one step further and try to spread the risk across a portfolio of investments. Perhaps you should do the same with money managers? Pick the 10-20 at the top of the field and let them all manage a piece of your portfolio? Obvious problems here as well. On a related note, does this mean that venture funding is fundamentally flawed? That venture funds would be better off just putting their money in index funds? I have a hard time seeing that.
    - mattmaroon 18y ago
      It's not hard to differentiate between those who have true skill and those who got lucky, it's impossible. The variance is just too high. Hard implies that if you worked at it enough, you could somehow do it. You can't. And yes, venture funding is fundamentally flawed and the average VC firm underperforms the market. LPs as a whole would be better off with index funds. However, unlike with equities, you can get an edge in VC investing because results tend to perpetuate themselves. Remember, equities of non-public companies aren't priced by the market, so they aren't as efficient, and it's the efficiency of the market that makes beating it untenable. Also there's a tremendous deal of collusion in private equity that doesn't exist in public due to regulation. It's actually a mystery to me how they get away with much of what they do. The two types of investing aren't really comparable due to that. You could simply invest every year in the top few VC firms from the previous year and outperform the market for a long time that way. You cannot do this with hedge funds or mutual funds, or if you could, you and I would both not support the notion of just sticking it in ETFs.
- deleted 18y ago
  [deleted]
- mattmaroon 18y ago
  No, you really can't say that for almost any field. Money management and poker tournaments are about all I can come up with. In any competitive field with a quantifiable scoreboard, you could take the data, extract from it means and standard deviations, and say with x% certainty that one player is better than another. In money management, x is never very large. It's so small that you can't reliably say that anyone is better than anyone else, in fact the overall distribution of money managers isn't much different from what it would be if it were all chimpanzees selecting stocks with darts. In basketball or chess, x gets to pretty near 100.