Be the bid!

[KrazyHorse]

What hope does anyone have, professional or independent? Either your evaluation is better than the current market evaluation, or it's not. That's irrelevant to the issue of how buying issues affects price.

NO! If a "smart" mutual fund of a couple of hundred million cannot find significant values in which to put its money (specifically, if we're assuming 100% equities restriction that it can't find enough places to put it which are better than the average equity) then this means that the total amount of space is small. This means that there is a large amount of money chasing a very small amount of value space. Which means that your chances of being among the smart ones who get there is vanishingly small!

[KrazyHorse]

Originally posted by Aeson
What I'm saying about the upward pressure on price due to buying makes sense in any case.

Yes, and if it's this mechanism then you should give up and buy indexes. Why should you gamble on being one of the very few?

[KrazyHorse]

If there was a lot of money lying around and there was at least a significant number of people who could beat the market on average then some mutual funds would be very good at picking up money. The fact that there are basically none who do this well implies either that:

1) Ability is very, very rare

or

2) The amount of money lying around is very, very small.

But what does 2 mean? It means that in order to pick up the money you have to beat out almost everybody else. Which implies 1!

[KrazyHorse]

I would honestly be fascinated if any of you who believe that you can consistently do better than an index while restricted to 100% equities would post a thread detailing either real trades or fake trades as you would complete them. Or if you want to allow yourself to move into and out of equities in favour of bonds or money market, if you could consistently do better than somebody who followed your strategy but who bought indexes of the asset classes you buy. I think that there is a bit of market psychology involved in risk-aversion, as previously stated, so I want to disaggregate this effect.

[Aeson]

Originally posted by KrazyHorse


Aeson, you are obviously not thinking very clearly about this.

Your claim seems to be that the entry of a single "smart" fund worth a couple of hundred million crowds out a significant portion of the excess value in the market. That means that to get in on significant excess value you need to be among the top couple of hundred million!

No.

What I said is the more money you put into a specific opportunity, the less your (evaluated) profit margin becomes. I expressly noted that in some specific opportunities this has more effect than in others (where it can be essentially negligible for ~$100m).

I have not put limitations on the amount of opportunity across the market other than to say it's limited to less than the whole (what % of the whole will depend on evaluation and requirements). What I have said is that given an evaluation (doesn't matter who's, or whether it's right or wrong) there will necessarily be a hierarchy of "value". The most "value" available via that evaluation will be at the top of that hierarchy, and as you move down it, the "value" will decrease.

Both of these effects simply say that the more money you have to invest, the less % the overall portfolio can achieve any given level of "value" in that hierarchy and/or a specific issue.

I already explained how your hypothesis that this particular diseconomy of scale allows individual investors to take advantage of what mutual funds cannot doesn't make any sense.

It doesn't disallow mutual funds to take advantage of the opportunity, and I haven't claimed it did. It disallows mutual funds to take advantage of similarly evaluated opportunity across their entire portfolio. A small investor can invest in the absolute best opportunities they can find only, and their investments will not effect the price all that much either. A larger investor will further shrink their margins across the entire investment with their excess capital into an issue, and/or have to invest it in less attractive evaluations.

[KrazyHorse]

There has to be some sort of fake NYSE we could set this up on...

[KrazyHorse]

Originally posted by Aeson


No.

What I said is the more money you put into a specific opportunity, the less your (evaluated) profit margin becomes.

Who cares about specific opportunities? I'm talking about the mutual fund allocating some portion of its money to one opportunity, then some other portion to another opportunity.

I have not put limitations on the amount of opportunity across the market other than to say it's limited to less than the whole (what % of the whole will depend on evaluation and requirements). What I have said is that given an evaluation (doesn't matter who's, or whether it's right or wrong) there will necessarily be a hierarchy of "value". The most "value" available via that evaluation will be at the top of that hierarchy, and as you move down it, the "value" will decrease.

I understand that there is a supply curve for the asset you're trying to buy, thanks.

Both of these effects simply say that the more money you have to invest, the less % the overall portfolio can achieve any given level of "value" in that hierarchy and/or a specific issue.

Again, who cares about specific issues?

It doesn't disallow mutual funds to take advantage of the opportunity, and I haven't claimed it did. It disallows mutual funds to take advantage of similarly evaluated opportunity across their entire portfolio. A small investor can invest in the absolute best opportunities they can find only, and their investments will not effect the price all that much either.

Yes, but once they're done one why the **** don't they move on to the next? Unless there isn't another one!

[KrazyHorse]

If your claim is that it's perhaps because a single individual (fund manager) may only have the specific knowledge and expertise see such opportunities very rarely then I agree with you. And this is the whole point. When expertise exists, it is usually specific and non-reproducible. It is not applicable over a broad range of assets. It is transitory. It is a few-times-in-a-lifetime type of thing to see an asset which you have the knowledge to evaluate fairly as fundamentally mispriced. Most alleged mispricings therefore stem from optimism and ability bias.

[Aeson]

Originally posted by KrazyHorse
I would honestly be fascinated if any of you who believe that you can consistently do better than an index while restricted to 100% equities would post a thread detailing either real trades or fake trades as you would complete them. Or if you want to allow yourself to move into and out of equities in favour of bonds or money market, if you could consistently do better than somebody who followed your strategy but who bought indexes of the asset classes you buy. I think that there is a bit of market psychology involved in risk-aversion, as previously stated, so I want to disaggregate this effect.

I've already said it's not for most people.

The only investing I've done in individual issues was in Lehman this summer. Buying PUTS. I posted a bit about it in the Lehman thread we had here at Poly. I came out of it beating the indexes in that timeframe (not really much of a challenge that ) by a rather hefty margin.

I don't claim to be able to beat the markets consistently though. I neither have the capital to ensure enough shots at it to reduce the impact of luck, nor the temperament to want to keep my money in such a volatile situation very long. If I was investing, it would be indexes or broad based funds (but not yet), with only little plays on the side in options if something approaching a sure thing like Lehman's collapse popped up again.

If you are interested in investments independent investors are making, there are plenty of forums out there where people detail their moves. Some people do better than others obviously.

[Aeson]

Originally posted by KrazyHorse
Yes, and if it's this mechanism then you should give up and buy indexes. Why should you gamble on being one of the very few?

I've never said otherwise.

I simply gave a coupe of the reasons why a "good" mutual fund couldn't simply do 'value' investing as efficiently as a similarly "good" 'value' trader could across their portfolio (assuming that the mutual fund's portfolio is many times that of the individual investor).

[KrazyHorse]

If you are interested in investments independent investors are making, there are plenty of forums out there where people detail their moves. Some people do better than others obviously.

I am interested in the results. I want studies. Specifically, I want studies which pull out the investors who do well in one period, then look at this subset for another period. Previous studies which follow mutual funds like this show that returns as a function of time are white noise. The returns in one period are almost wholly uncorrelated with the returns during any other period.

[KrazyHorse]

Originally posted by Aeson


I've never said otherwise.

I simply gave a coupe of the reasons why a "good" mutual fund couldn't simply do 'value' investing as efficiently as a similarly "good" 'value' trader could across their portfolio (assuming that the mutual fund's portfolio is many times that of the individual investor).

The mutual fund cannot do as well only if we assume that:

1) The opportunities are generally very shallow
2) The opportunities an individual can see are sufficiently rare that the fund cannot find a few at a time to drop bits of its value in

1 and 2 together mean that the times when an individual can see a significant asset mispricing are extraordinary events. They happen when he shares some combination of specific knowledge with only a few other people in the market.

[Aeson]

Originally posted by KrazyHorse
Who cares about specific opportunities? I'm talking about the mutual fund allocating some portion of its money to one opportunity, then some other portion to another opportunity.

And as I said, the "other" opportunity will generally not be "as good" an opportunity in the evaluation. You start with the best opportunities and work your way down to those with the least assumed profit margin.

Thus the more money you have to invest, the further you work your way down the ladder (that you have evaluated).

Again, who cares about specific issues?

Anyone who is evaluating the specific issue.

Yes, but once they're done one why the **** don't they move on to the next? Unless there isn't another one!

There are other ones. It's just as you progress through your list of (evaluated) opportunities, you necessarily start with the best opportunities and work your way down. This means there is a limit to the amount of money that can go into any specific level of opportunity.

How limited that level of opportunity is (or rather seems to be), is dependent on who is making the evaluations and what they come up with.

[KrazyHorse]

Originally posted by Aeson
There are other ones. It's just as you progress through your list of (evaluated) opportunities, you necessarily start with the best opportunities and work your way down. This means there is a limit to the amount of money that can go into any specific level of opportunity.

If a fund was even able to consistently get 20% of itself into significantly mispriced assets while basically buying the index with the other 80% this fund's manager would be a hero among investors. And we don't see any evidence of such funds!

[Aeson]

Originally posted by KrazyHorse
If a fund was even able to consistently get 20% of itself into significantly mispriced assets while basically buying the index with the other 80% this fund's manager would be a hero among investors. And we don't see any evidence of such funds!

Depends on what you mean by "significantly". As that becomes more and more exclusive, so too will the group of people who can claim to take advantage of it.