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What is the market? A bunch of fund managers. So your critique about not beating the median like saying half of all hockey players are worse than the median and

by mdkess 13y ago

What is the market? A bunch of fund managers. So your critique about not beating the median like saying half of all hockey players are worse than the median and so hockey is just a game of chance. You have to fix your prior. Track performance for some period of time. Then track the winners. This will show whether it's a game of skill or chance.

dredmorbius 13y ago
The hockey analog doesn't hold if you can replace any given player with a stochastic robot, which is what stock picker programs (and dart-throwing monkeys) have demonstrated.
valisystem 13y ago
You have to adjust your evaluation with the volume. If you're heading for the winning team, then alright, good intelligence on performance will be rewarded. But if you are three investors on the entire competition, it is very likely that skills advantage fades, since all your competitors have strong (if not mandatory) incentive to get top intelligence on the investment. In the end, your performance will be average, and your value earnings volumes will be your share of the entire market value creation for the invested period.
lutusp 13y ago
> What is the market? A bunch of fund managers. This is like saying all personal relationships are limited to prostitutes. One can buy stocks directly, or invest in index mutual funds that don't have managers, for the reason that no management is required. > Then track the winners. This will show whether it's a game of skill or chance. But that's been done -- the WSJ Dartboard Contest showed that the experts don't do better than throwing darts at a list of stocks. http://online.wsj.com/article/SB10001424127887324504704578410864000872642.html http://online.wsj.com/article/SB1000142412788732450470457841... My point is that buying and holding an index fund, and relying on long-term market growth instead of phony expertise, is a much better approach to equity investment.
conanbatt 13y ago
The market is NOT a bunch of fund managers. Its a representation of the state of assets being debt/credit or company shareholding. The market does not do better because there are fund managers, it does better if the underlying assets increase in value. All the other fluctuations are based on expectancies of those assets and arbitration. It is entirely possible for 100% of fund managers to do below the market average, as fund managers dont own 100% of the market. It is also likely they have a losing bet against a market, as active fund managers employ resources in their operations, by trading and actively managing a portfolio, usually in the form of fees, and potential downsides on extra taxation as well. Tracking "the winners" is the most fallacious and common attempt at gauging how good a fund manager or a stock is doing. Bernie Madoff was one of the winners for decades. Past results give no expectation to the future, which is so misleading given that the most common tool to show the value of a stock is a chart of how it did before, as opposed to how the company is doing (which require reading the statement). I suggest reading "The Intelligent Investor". It is by far the best book on this topic out there , and it has enough layman terms and concepts that are very easy to understand once you expose yourself to them.
- mdkess 13y ago
  While I think The Intelligent Investor is a worthwhile book, I think it got it wrong for the very reasons I mentioned above. Anyway, I'm not making any argument here for how the market works, other than pointing out that saying that half of fund managers do worse than the median does not imply that they are unskilled or not providing value. Nor am I saying that they do provide value, but rather the original theory is both flawed and insufficient to make a conclusion. In games of skill, past results certainly give expectations of future results. Going back to the hockey analogy, I would expect the top 10% of performers over five years (determined by some metric) would as a whole outperform a random sample of 10% of the league in a sixth year. Madoff is a bad example here - he was breaking the law, but nobody knew. If you catch a top sports player doping, it doesn't suddenly mean that the game is a game of chance, or that all of the top performers are cheaters (although repeatedly catching cheaters may indicate systematic problems) - rather it means that someone cheated to fake performance. They were playing a different game, but nobody knew. Going back to the original point, if you want to determine whether something is a game of chance or skill, you have to fix the prior. Let's say we had coin flipping tournaments, and people were claiming that it's a game of skill. Looking at past statistics, some people seemed to perform far better than the expected 50-50 split. You however claim that coin flipping is just a game of chance. How do you prove it? You look at results for some period of time, say five years. Take the "winners" from that group - say the top 20% of performers. Under the hypothesis that it's a game of skill, these should be a selection of the most skilled people. Now track their results for a sixth year. If it was a game of skill, the expectation would be that as a whole, these individuals would continue to perform at a high level. However, as a game of chance, you would expect performance to be completely random among these high performers - and by doing this, you can determine whether coin flipping is a game of chance or skill.

by mdkess 13y ago

dredmorbius 13y ago

The hockey analog doesn't hold if you can replace any given player with a stochastic robot, which is what stock picker programs (and dart-throwing monkeys) have demonstrated.

valisystem 13y ago

You have to adjust your evaluation with the volume. If you're heading for the winning team, then alright, good intelligence on performance will be rewarded. But if you are three investors on the entire competition, it is very likely that skills advantage fades, since all your competitors have strong (if not mandatory) incentive to get top intelligence on the investment. In the end, your performance will be average, and your value earnings volumes will be your share of the entire market value creation for the invested period.

lutusp 13y ago

> What is the market? A bunch of fund managers. This is like saying all personal relationships are limited to prostitutes. One can buy stocks directly, or invest in index mutual funds that don't have managers, for the reason that no management is required. > Then track the winners. This will show whether it's a game of skill or chance. But that's been done -- the WSJ Dartboard Contest showed that the experts don't do better than throwing darts at a list of stocks. http://online.wsj.com/article/SB10001424127887324504704578410864000872642.html http://online.wsj.com/article/SB1000142412788732450470457841... My point is that buying and holding an index fund, and relying on long-term market growth instead of phony expertise, is a much better approach to equity investment.

conanbatt 13y ago

The market is NOT a bunch of fund managers. Its a representation of the state of assets being debt/credit or company shareholding. The market does not do better because there are fund managers, it does better if the underlying assets increase in value. All the other fluctuations are based on expectancies of those assets and arbitration. It is entirely possible for 100% of fund managers to do below the market average, as fund managers dont own 100% of the market. It is also likely they have a losing bet against a market, as active fund managers employ resources in their operations, by trading and actively managing a portfolio, usually in the form of fees, and potential downsides on extra taxation as well. Tracking "the winners" is the most fallacious and common attempt at gauging how good a fund manager or a stock is doing. Bernie Madoff was one of the winners for decades. Past results give no expectation to the future, which is so misleading given that the most common tool to show the value of a stock is a chart of how it did before, as opposed to how the company is doing (which require reading the statement). I suggest reading "The Intelligent Investor". It is by far the best book on this topic out there , and it has enough layman terms and concepts that are very easy to understand once you expose yourself to them.

mdkess 13y ago
While I think The Intelligent Investor is a worthwhile book, I think it got it wrong for the very reasons I mentioned above. Anyway, I'm not making any argument here for how the market works, other than pointing out that saying that half of fund managers do worse than the median does not imply that they are unskilled or not providing value. Nor am I saying that they do provide value, but rather the original theory is both flawed and insufficient to make a conclusion. In games of skill, past results certainly give expectations of future results. Going back to the hockey analogy, I would expect the top 10% of performers over five years (determined by some metric) would as a whole outperform a random sample of 10% of the league in a sixth year. Madoff is a bad example here - he was breaking the law, but nobody knew. If you catch a top sports player doping, it doesn't suddenly mean that the game is a game of chance, or that all of the top performers are cheaters (although repeatedly catching cheaters may indicate systematic problems) - rather it means that someone cheated to fake performance. They were playing a different game, but nobody knew. Going back to the original point, if you want to determine whether something is a game of chance or skill, you have to fix the prior. Let's say we had coin flipping tournaments, and people were claiming that it's a game of skill. Looking at past statistics, some people seemed to perform far better than the expected 50-50 split. You however claim that coin flipping is just a game of chance. How do you prove it? You look at results for some period of time, say five years. Take the "winners" from that group - say the top 20% of performers. Under the hypothesis that it's a game of skill, these should be a selection of the most skilled people. Now track their results for a sixth year. If it was a game of skill, the expectation would be that as a whole, these individuals would continue to perform at a high level. However, as a game of chance, you would expect performance to be completely random among these high performers - and by doing this, you can determine whether coin flipping is a game of chance or skill.