Author Topic: Advice on Learnin'  (Read 1488 times)

accolay

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Advice on Learnin'
« on: March 03, 2017, 04:32:01 PM »
I'm wondering about the best way to get some deeper knowledge on investing. I've gained a considerable amount of information for my own plan while reading on this blog, but I want more.

Basically, I want to be able to analyze and interpret a report such as this: http://www.mnpera.org/vertical/Sites/%7BCB6D4845-437C-4F52-969E-51305385F40B%7D/uploads/Complete_2016_CAFR_reduced_file_size.pdf

MN PERA investment "return" was -0.1% in FY16. Despite spending 34 million in investment fees and 60% stock. Not that I'm going to be relying on this pension in my plan, but a lot of people are...and the general fund is only 72% funded.

I want to understand the report better. What kind of degree do you need for this? Is there a book one could recommend to explain concepts?

Thanks in advance.

Hargrove

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Re: Advice on Learnin'
« Reply #1 on: March 03, 2017, 07:57:33 PM »
The report is extremely dry but it's not really loaded with jargon. Do you expect to be able to analyze it for what went wrong...? You may be misleading yourself about "deeper" knowledge.

The answer isn't in the report. 2016 could have been terrible. But, it wasn't. If you really want to know all the terms and such, you could just look up what it takes to get a broker's license and take finance and investment banking courses. But mostly the report is "here's what we thought we could do, and here are the minute details of our categories, and here's how much people got paid and how much money was in the fund every 30 minutes for the last ten years." But, it doesn't really show how they threw away their results, just that they had a really complicated plan for getting them.

I guess the answer is, kind of, in the report:

Based on values on June 30, 2016, the Combined Funds
returned 5.3 percentage points above the CPI over the last
20 years and returned 0.2 percentage point above the
composite index over the past 10 years.


In other words, the fund's objective, which was to beat an index fund weighted similarly to how their fund allocations were set up, was a task they met with a clownishly complex scheme (only the results of which, not the decisions) are detailed in the report. They beat the index they considered their competition by ZERO POINT TWO PERCENT over the last ten years. So, the dozens of financial advice firms and probably hundreds of people making money off this "plan" added nearly irrelevant value in exchange for gobs of money (for a net significant loss in value).

Hiring investment bankers is like hiring a gambler who is down $60 at the $20 blackjack table to make you a winner, then handing over your cash. He has to beat his own negative before he can make you any money, so not only does he have to be good to get you returns, he has to be better than you. Unfortunately, that's even harder for him, because every Mustachian is issued a slot machine that lands Triple Vanguard every time you pull the lever after putting in a dollar, and it spits out $1.07.

For a very quick tutorial on how silly "deeper knowledge" quickly becomes, try looking up "Elliott Wave Theory" on Youtube. It seems pretty simple. The market tends to move in waves, ok. The market reacts to wave interruptions of a kind of magnitude bucking a trend, and third time's a charm - that's the "marker" for the end of that trend. Ok, this sounds really easy. And that's it, ta daaa! So what's the problem? Well, the wave goes forward indefinitely, so you don't really know how the wave is going to play out, or at what segment of the wave you are, because you don't know the timetable of the wave you're on... because it doesn't end. "Hey, we found an event more than once on this infinite line, alert the news!"

You start with a simple plan and "deeper" knowledge is usually elusive. But there are intensely complicated plans for "figuring this out" (like this very long report) that frequently do worse than Lazy Portfolios and have 10x the fees. In short, in-depth investment plans are like in-depth plans to win the lottery "because it's Tuesday and .01% more people won on Tuesdays." This plan invested in Apple and GE and other megacaps, a bunch of stable junk for stability (it is a pension fund after all), and it made virtually no returns by chasing big returns.

The deeper knowledge is this:

To get rich REALLY fast, make a hugely leveraged bet on a single company. If this doesn't work, you will probably go bankrupt, which will happen most of the time.

To get rich somewhat quickly, do not do the above at all, and just invest in index funds.
« Last Edit: March 03, 2017, 08:01:45 PM by Hargrove »

pbkmaine

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Re: Advice on Learnin'
« Reply #2 on: March 03, 2017, 08:40:33 PM »
A lot of these pension funds got heavily into "Alternative Investments" following Yale University's success.

http://www.investopedia.com/terms/a/alternative_investment.asp

However, alternatives have gotten killed in recent years. 13% of this fund is in alternatives. Part of that, the "Resource Pool", had a negative 24% return last year. This is particularly bad.

In addition, 14% of the portfolio is in international funds. They had a negative 10% return. The funds must be actively managed, because their benchmark, the Morgan Stanley Capital All Country World Index, was actually up 4.5% in US dollars in 2016.

I read a lot of these reports, and they have showed me, time and time again, that it's very hard to beat index funds, particularly for equities (stocks).

pbkmaine

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Re: Advice on Learnin'
« Reply #3 on: March 03, 2017, 08:42:31 PM »
As far as reading financial reports, perhaps start with this? I was given a copy of this in the first semester of my MBA program.

http://e145.stanford.edu/upload/Merrill_Lynch.pdf

MustacheAndaHalf

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Re: Advice on Learnin'
« Reply #4 on: March 03, 2017, 08:50:04 PM »
SPIVA scorecard tracks passive vs active mutual funds.  Full time experts paid staggering incomes are falling behind index investing over 80% of the time.  And in advance we can't know which ones will beat or lose to the market's wisdom.  Whenever you try to pick stocks, you are claiming the market is inefficient and you've found a unique opportunity the market has missed.

Radagast

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Re: Advice on Learnin'
« Reply #5 on: March 04, 2017, 01:01:10 AM »
If you are strictly learning the investment side, David Swensen is a good writer and probably the best institutional investor. His "Unconventional Success" and "Pioneering Portfolio Management" (I have not read the second one but it should be more relevant) are good reads.

accolay

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Re: Advice on Learnin'
« Reply #6 on: March 04, 2017, 01:23:39 AM »
If you are strictly learning the investment side, David Swensen is a good writer and probably the best institutional investor. His "Unconventional Success" and "Pioneering Portfolio Management" (I have not read the second one but it should be more relevant) are good reads.

Thank you. I think is more along the lines of what I'm looking for to understand more of that side of things.

I want to know more of the jargon. It might sound funny from those in the know, but a lot of that report really reads like Greek to me.  I understand that index funds pretty much always beat actively managed funds, not a concept I'm fighting against. Maybe if I read more of these types of reports the info will eventually soak in.