Be the bid!

[KrazyHorse]

No doubt they do. However, they tend to be armed with different philosophies.

Do you mind explaining?

[KrazyHorse]

Originally posted by VJ

You're overestimating intelligence of the market. There have always been sweet deals available. The reason most people should buy index funds instead of invididual stocks is that micromanagering diversified stock holdings and following data from all the corporations becomes too much of a hassle unless you're having something like >$100k total invested, not that you can only beat index averages by having insider advantage.

Then why is it that such a vast majority of mutual fund managers do so terribly?

It's really surprising how irrationally stock prices can sometimes behave. Making a blanket statement like that proves only that you haven't been following price fluctuations of invididual stocks for long.

I don't follow price fluctuations of individual stocks at all. I am very open to criticism on this point, VJ.

[DanS]

Originally posted by KrazyHorse

No doubt they do. However, they tend to be armed with different philosophies.

Do you mind explaining?

Sure. I'm a value investor.

[KrazyHorse]

Originally posted by DanS


Sure. I'm a value investor.

Why would mutual fund manages not adopt this philosophy in order to gain consistent supernormal returns (or, more properly, why does it appear that only a vanishingly small number of them successfully adopt this philosophy)?

[KrazyHorse]

The data and the theory I'm aware of both suggest that active management (either personal or delegated) is a bad idea for the overwhelming majority of investors. I am seriously interested in either compelling theoretical or empirical arguments which contravene this.

To put it another way, I know why I consistently win when I play poker: it's because I don't have to play against Gus Hansen or Daniel Negreanu. That restriction does not apply in the markets.

[DanS]

In the real world, things don't tend to work that way (re #125).

The number of funds using the value investing philosophy shrank because for a long time there weren't that many attractively priced assets under the philosophy. A fund will go out of business if it doesn't have a steady stream of investment ideas. Allocating more and more money to cash will get you fired.

[KrazyHorse]

Originally posted by DanS
In the real world, things don't tend to work that way (re #125).

The number of funds using the value investing philosophy shrank because for a long time there weren't that many attractively priced assets. A fund will go out of business if it doesn't have a steady stream of investment ideas. Allocating more and more money to cash will get you fired.

So if we were to run a study starting immediately we should see a reasonable number of funds which outperform the market over multiple time periods (reasonable number above the number which would do this simply due to dumb luck)?

One would think that at least some portion of the market would already have learned this lesson. But I'm open to new data, as I said.

[KrazyHorse]

One would also think that even restricted to going 100% equities would allow value investors to choose less bad assets. People who did this would be expected to (under your assumptions) lose less money (which would be counted as winning under the studies of fund performance I've seen).

[KrazyHorse]

I don't deny the existence of a small number of people with idiosyncratic ability. But the number of people who have optimism and ability biases is much, much higher.

[RGBVideo]

Originally posted by KrazyHorse


Why would mutual fund manages not adopt this philosophy in order to gain consistent supernormal returns (or, more properly, why does it appear that only a vanishingly small number of them successfully adopt this philosophy)?

You know, this is a really good question. Why were future traders willing to speculative with crude oil for 130$/bbl this summer when it was public knowledge that refinement from oil sands (or biodiesel, or fill in with the alternative of your choice) would cost $60/bbl and it would last for at least ten generations? Why didn't the market react to Obama's election at all until after he was elected altough he had a scientifically predicted electability probability of around 95% the week before the election? Why were invididual investors from Minneapolis and San Diego willing to buy GM stocks at $30/share in '07 when the EPS had been negative for almost a decade and it was clear from the way the company used money that it wouldn't have a positive P/E for at least a decade?

Well, I've been trying to research the subject for as long as I've followed this thing called "the stock market", in Finland and in the US. The best answer I've encountered so far is: Who knows... and who cares? Perhaps it is that the people are stupid. Perhaps it is that the people are over-emotional and are willing to go with their feelings instead of the cold data available. Perhaps it is that the people don't have the courage to make their own conclusions and are more willing than they should to go with the flow, to follow the trends of the times. Either way, there's always money to be made by buying under-valued and selling over-valued.

[DanS]

Re #129, choosing less bad assets isn't really part of the value investing repertoire, or at least goes against the grain. A bad deal is a bad deal. Let me address #128 when I have more time.

[snoopy369]

Don't forget the 'earning a paycheck' element of fund managers also... if they went with unsexy value options, they are less likely to earn said big paycheck. Most of them think they're god's gift to stock traders anyway...

[KrazyHorse]

Why were future traders willing to speculative with crude oil for 130$/bbl this summer when it was public knowledge that refinement from oil sands (or biodiesel, or fill in with the alternative of your choice) would cost $60/bbl and it would last for at least ten generations? Why didn't the market react to Obama's election at all until after he was elected altough he had a scientifically predicted electability probability of around 95% the week before the election? Why were invididual investors from Minneapolis and San Diego willing to buy GM stocks at $30/share in '07 when the EPS had been negative for almost a decade and it was clear from the way the company used money that it wouldn't have a positive P/E for at least a decade?

Well, I've been trying to research the subject for as long as I've followed this thing called "the stock market", in Finland and in the US. The best answer I've encountered so far is: Who knows... and who cares? Perhaps it is that the people are stupid. Perhaps it is that the people are over-emotional and are willing to go with their feelings instead of the cold data available. Perhaps it is that the people don't have the courage to make their own conclusions and are more willing than they should to go with the flow, to follow the trends of the times. Either way, there's always money to be made by buying under-valued and selling over-valued.

Then would you mind starting a thread in which you detail all of your transactions as you complete them so we can see what your returns are relative to what would be expected from the efficient markets hypothesis? What would you estimate your return rate (above a time-averaged mix of risk-free plus index fund per CAPM) is? What is the volatility of your returns?

[KrazyHorse]

Originally posted by DanS
Re #129, choosing less bad assets isn't really part of the value investing repertoire, or at least goes against the grain

????

Why?

You simply throw out one of your options (cash) and apply the same principles.

[KrazyHorse]

Originally posted by snoopy369
Don't forget the 'earning a paycheck' element of fund managers also... if they went with unsexy value options, they are less likely to earn said big paycheck.

There are certainly adverse incentives round. But there are funds with better incentive structures who don't seem to be any better at this.

Most of them think they're god's gift to stock traders anyway...

So do most casual stock pickers.