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Ranking people by their recommendation performance is going to be very misleading for most people. There is this natural intuition to look at the top performers

by gibybo 12y ago

Ranking people by their recommendation performance is going to be very misleading for most people. There is this natural intuition to look at the top performers and try to learn from them. In reality, the rankings would look almost identical if everyone just picked everything randomly. Mutual funds and hedge funds exploit this all the time. They start lots of funds that all invest a little differently. They cull the losers and keep the ones that happened to do well. Then they sell prospective investors on their past performance of one particular fund when in reality they didn't need anything more than random chance and multiple tries to get it.

carbocation 12y ago
Thanks, this was my immediate thought. If Bogle's thesis is correct (which is perhaps equivalent to the efficient market hypothesis), then there should not be anything to be gained by looking at these folks' stock picks in general. Retrospectively, of course, some of their picks should look like pure gold.
math 12y ago
I'd like to add that difficulty in measuring independence of recommendations makes the task of trying to estimate the likelihood of a particular result for a person or fund being a real out performance extremely difficult. If independence is underestimated (or not accounted for at all), the performance will look far more statistically significant than it actually is. There are other issues too, like non-gaussian return distributions, but I think estimating independence is the killer. Note that dependencies between securities are non-linear, eg increased co-movement of securities during times of high volatility. We're trying to model all this at http://backrecord.com http://backrecord.com We're very close to releasing something..
User9812 12y ago
Agreed. I could register accounts for 1,000 five year old children and let them pick stocks, and one of them would have what appears to be great insight and recommendations. Does that mean we should follow the child's next move? I hope not.
spacemanmatt 12y ago
Well, this certainly colors my thought-experiment of creating several Nvest accounts that apply various strategies including random.

by gibybo 12y ago

carbocation 12y ago

Thanks, this was my immediate thought. If Bogle's thesis is correct (which is perhaps equivalent to the efficient market hypothesis), then there should not be anything to be gained by looking at these folks' stock picks in general. Retrospectively, of course, some of their picks should look like pure gold.

math 12y ago

I'd like to add that difficulty in measuring independence of recommendations makes the task of trying to estimate the likelihood of a particular result for a person or fund being a real out performance extremely difficult. If independence is underestimated (or not accounted for at all), the performance will look far more statistically significant than it actually is. There are other issues too, like non-gaussian return distributions, but I think estimating independence is the killer. Note that dependencies between securities are non-linear, eg increased co-movement of securities during times of high volatility. We're trying to model all this at http://backrecord.com http://backrecord.com We're very close to releasing something..

User9812 12y ago

Agreed. I could register accounts for 1,000 five year old children and let them pick stocks, and one of them would have what appears to be great insight and recommendations. Does that mean we should follow the child's next move? I hope not.

spacemanmatt 12y ago

Well, this certainly colors my thought-experiment of creating several Nvest accounts that apply various strategies including random.