Author Topic: Another "beating the market" thread  (Read 3109 times)

cheapass

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Another "beating the market" thread
« on: February 16, 2017, 01:34:03 PM »
So I'm a big believer in passive index fund investing. I'm not going to outsmart the collective intelligence of the world's investors, including those who spend 90 hours a week trying to stock pick and time the market. It would be quite naive of me to think that I could beat them at a game even they can't consistently win.

That being said, what do you guys think of the "exclusive" funds that have proven to yield above-market returns for years? One that comes to mind is Dunn Capital. Their funds are only available to "accredited investors" who have a net worth > $1M or annual income > $200K ($300K if married).

From their website - DUNN's flagship World Monetary & Agriculture ("WMA") Program has achieved a net compounded annual rate of return of over 14% since inception in 1984.

TheAnonOne

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Re: Another "beating the market" thread
« Reply #1 on: February 16, 2017, 01:41:37 PM »

That being said, what do you guys think of the "exclusive" funds that have proven to yield above-market returns for years? One that comes to mind is Dunn Capital. Their funds are only available to "accredited investors" who have a net worth > $1M or annual income > $200K ($300K if married).

From their website - DUNN's flagship World Monetary & Agriculture ("WMA") Program has achieved a net compounded annual rate of return of over 14% since inception in 1984.

Obviously some funds beat the market for periods of time. What if this fund is going to lose money for the next 20 years? Timing the market through funds is still timing the market.

You have no crystal ball, this fund could continue to succeed, or it could lag for decades after a 'good run'

marty998

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Re: Another "beating the market" thread
« Reply #2 on: February 16, 2017, 02:29:53 PM »
Do you know what happens to a fund that outperforms for a significant period of time? Not only does it start to get large from the returns, it also starts attracting more capital from investors thus furthering the growth in assets.


When a fund gets large it is harder for a fund manager to take large (and agile) positions in small & mid cap stocks, which are the drivers of outperformance (because buying large cap will only likely get you index-like returns).


Consequently many fund managers will cap the size of their funds and not take on new money in order to avoid this problem.


However, there are always the greedy ones out there who want to keep growing AUM... you need to watch out for them which involves more and more research.

jjcamembert

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Re: Another "beating the market" thread
« Reply #3 on: February 16, 2017, 02:42:35 PM »
My limited understanding of these prop firms or hedge funds is that they stay small (manage millions instead of billions) and use significant leverage (20x or more). So by staying small, they can take advantage of market liquidity to get in and out of positions whenever they want; far more nimble than any large fund can do.

As a consumer, I don't know what advantage you'd get from one of these funds because the fees tend to be high (the fund managers often take a significant % of profits), and there may be rules about when you can withdraw your money from the fund.

neil

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Re: Another "beating the market" thread
« Reply #4 on: February 16, 2017, 03:40:05 PM »
Peter Lynch is pretty famous for taking Fidelity Magellan (FMAGX) to heights and his books talks about his strategies and how he handled the 1987 crash.  He took over when it was a small fund and it became massive.  I presume when he stepped down, Fidelity considered his replacement very carefully.

Magellan continued to outperform for a while.  In 1996, one of the managers tried to outsmart the overvalued markets by investing heavily in bonds and got creamed because they called the top too early.  It essentially became an index tracker after that and underperformed after the financial crisis.

This is an anecdote at best, but it is one that illustrates manager risk and the difficulty of continuing that performance as a large fund.

I was invested in FLPSX as one of the less-bad options in my 401K and familiarity with Fidelity, and it was essentially a mid-cap index tracker.  It looked nice compared to the S&P during the 2000s but I could have easily bought a mid-cap index (except at the time, I really couldn't do so).

Logistically, if I were to try successful investment managers, I am not sure how many years are enough to prove outperformance and, once established, how many years they have left at the same commitment level.  In some ways it might be harder to bet on individuals rather than betting on companies, if I had to choose.

People should invest how they are comfortable, but looking at very long term performance of a ticker might be useless simply due to employee turnover and I would caution people who asked my opinion.

Indexer

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Re: Another "beating the market" thread
« Reply #5 on: February 16, 2017, 04:01:51 PM »
In "The Little Book of Common Sense Investing" Bogle talks about this, how some funds have outperformed over long periods of time.

Take ALL of the stock funds that exist, counting those that were closed(do to failure), calculate how many should outperform based solely on luck, and then compare it to how many funds actually outperformed. The results are within the margin of error. Funds that outperform over long periods of time are so rare that we can't identify if the managers are actually skilled or just lucky.

SeattleCPA

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Re: Another "beating the market" thread
« Reply #6 on: February 16, 2017, 05:43:41 PM »
Cheapass, you might really enjoy and find it super profitable to read both of David Swensen's books about investing, "Unconventional Success" and "Pioneering Portfolio Management."

Over one 25 year period, Swensen beat the stock market by 7% annually (so 17% vs %10). And what he says is, you can't do that with an active strategy in a traditional asset class. His idea, and his track record backs this up, is that you need to move into alternative asset classes and then have the resources and the investment skills to get top quartile managers.

If you're interested, you might like to look at this:

http://evergreensmallbusiness.com/successful-active-investor/

But to save you the click, you and I can't do what the Yale Endowment Fund did/does.


CorpRaider

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Re: Another "beating the market" thread
« Reply #7 on: February 17, 2017, 06:34:07 AM »
Neither can Harvard, apparently.

NoStacheOhio

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Re: Another "beating the market" thread
« Reply #8 on: February 17, 2017, 07:35:45 AM »
Do you know what happens to a fund that outperforms for a significant period of time? Not only does it start to get large from the returns, it also starts attracting more capital from investors thus furthering the growth in assets.


When a fund gets large it is harder for a fund manager to take large (and agile) positions in small & mid cap stocks, which are the drivers of outperformance (because buying large cap will only likely get you index-like returns).

This is essentially what happened to Bernie Madoff. He was initially successful, and more and more money started pouring in, to the point where he couldn't manage all of it. Instead of saying, "no more money, thank you," he just kept taking it and started cooking the books.

SeattleCPA

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Re: Another "beating the market" thread
« Reply #9 on: February 17, 2017, 07:37:22 AM »
Neither can Harvard, apparently.

+1 :-)

Monkey Uncle

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Re: Another "beating the market" thread
« Reply #10 on: February 18, 2017, 04:57:16 AM »
Cheapass, you might really enjoy and find it super profitable to read both of David Swensen's books about investing, "Unconventional Success" and "Pioneering Portfolio Management."

Over one 25 year period, Swensen beat the stock market by 7% annually (so 17% vs %10). And what he says is, you can't do that with an active strategy in a traditional asset class. His idea, and his track record backs this up, is that you need to move into alternative asset classes and then have the resources and the investment skills to get top quartile managers.

If you're interested, you might like to look at this:

http://evergreensmallbusiness.com/successful-active-investor/

But to save you the click, you and I can't do what the Yale Endowment Fund did/does.

Comparing alternative asset classes to the stock market is not an apples-to-apples comparison.  His "outperformance" could be due simply to asset allocation rather than management skill.

Le Barbu

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Re: Another "beating the market" thread
« Reply #11 on: February 18, 2017, 06:29:19 AM »
My attempt to beat the market consist of:

Buying Vanguard broad and cheap index funds (100% stocks)

Own home country (Canada) stocks, US stocks, Intl stock and small cap value stocks

Trade mostly to buy and the least possible (rebalance if needed)

Leveraged portfolio 20% via HELOC

Minimize taxes and fees


SeattleCPA

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Re: Another "beating the market" thread
« Reply #12 on: February 20, 2017, 06:55:15 AM »
Cheapass, you might really enjoy and find it super profitable to read both of David Swensen's books about investing, "Unconventional Success" and "Pioneering Portfolio Management."

Over one 25 year period, Swensen beat the stock market by 7% annually (so 17% vs %10). And what he says is, you can't do that with an active strategy in a traditional asset class. His idea, and his track record backs this up, is that you need to move into alternative asset classes and then have the resources and the investment skills to get top quartile managers.

If you're interested, you might like to look at this:

http://evergreensmallbusiness.com/successful-active-investor/

But to save you the click, you and I can't do what the Yale Endowment Fund did/does.

Comparing alternative asset classes to the stock market is not an apples-to-apples comparison.  His "outperformance" could be due simply to asset allocation rather than management skill.

I'm not sure I understand your comment. But Swensen didn't beat the market because he used a difference asset allocation. (The reference to Harvard earlier in the thread is really a comment that Harvard tried to do what Swensen did but appears to be giving up because it's so hard to get the Yale endowment fund approach to work.)

What Swensen argues, as a generalization, is that people simply can't succeed with an active investor strategy in traditional asset classes... there, he says one optimizes by using a passive strategy. And in "Pioneering Portfolio Management" he explains how they've earned outsized returns in the alternative assets category (as compared to alternative asset benchmarks and to traditional asset benchmarks).

For the record, I think the individual investor takeaway from Swensen is that individual investors should use a passive strategy and invest in traditional assets... that if you did want to be an active investor, the first thing you'd need to do is move into alternative assets... but that in reality, succeeding with alternative assets is going to be a long-shot for anyone except a giant institutional investor and a giant risk as compared to traditional assets.

Monkey Uncle

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Re: Another "beating the market" thread
« Reply #13 on: February 20, 2017, 02:16:09 PM »
Cheapass, you might really enjoy and find it super profitable to read both of David Swensen's books about investing, "Unconventional Success" and "Pioneering Portfolio Management."

Over one 25 year period, Swensen beat the stock market by 7% annually (so 17% vs %10). And what he says is, you can't do that with an active strategy in a traditional asset class. His idea, and his track record backs this up, is that you need to move into alternative asset classes and then have the resources and the investment skills to get top quartile managers.

If you're interested, you might like to look at this:

http://evergreensmallbusiness.com/successful-active-investor/

But to save you the click, you and I can't do what the Yale Endowment Fund did/does.

Comparing alternative asset classes to the stock market is not an apples-to-apples comparison.  His "outperformance" could be due simply to asset allocation rather than management skill.

I'm not sure I understand your comment. But Swensen didn't beat the market because he used a difference asset allocation. (The reference to Harvard earlier in the thread is really a comment that Harvard tried to do what Swensen did but appears to be giving up because it's so hard to get the Yale endowment fund approach to work.)

What Swensen argues, as a generalization, is that people simply can't succeed with an active investor strategy in traditional asset classes... there, he says one optimizes by using a passive strategy. And in "Pioneering Portfolio Management" he explains how they've earned outsized returns in the alternative assets category (as compared to alternative asset benchmarks and to traditional asset benchmarks).

For the record, I think the individual investor takeaway from Swensen is that individual investors should use a passive strategy and invest in traditional assets... that if you did want to be an active investor, the first thing you'd need to do is move into alternative assets... but that in reality, succeeding with alternative assets is going to be a long-shot for anyone except a giant institutional investor and a giant risk as compared to traditional assets.

You said he "beat the stock market" by "investing in alternative assets."  All I'm saying is that his outperformance could have had more to do with the fact that the alternative assets outperformed stocks, and little or nothing to do with Swensen's skills as an active manager of those alternative assets.

SeattleCPA

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Re: Another "beating the market" thread
« Reply #14 on: February 20, 2017, 05:29:15 PM »
Cheapass, you might really enjoy and find it super profitable to read both of David Swensen's books about investing, "Unconventional Success" and "Pioneering Portfolio Management."

Over one 25 year period, Swensen beat the stock market by 7% annually (so 17% vs %10). And what he says is, you can't do that with an active strategy in a traditional asset class. His idea, and his track record backs this up, is that you need to move into alternative asset classes and then have the resources and the investment skills to get top quartile managers.

If you're interested, you might like to look at this:

http://evergreensmallbusiness.com/successful-active-investor/

But to save you the click, you and I can't do what the Yale Endowment Fund did/does.

Comparing alternative asset classes to the stock market is not an apples-to-apples comparison.  His "outperformance" could be due simply to asset allocation rather than management skill.

I'm not sure I understand your comment. But Swensen didn't beat the market because he used a difference asset allocation. (The reference to Harvard earlier in the thread is really a comment that Harvard tried to do what Swensen did but appears to be giving up because it's so hard to get the Yale endowment fund approach to work.)

What Swensen argues, as a generalization, is that people simply can't succeed with an active investor strategy in traditional asset classes... there, he says one optimizes by using a passive strategy. And in "Pioneering Portfolio Management" he explains how they've earned outsized returns in the alternative assets category (as compared to alternative asset benchmarks and to traditional asset benchmarks).

For the record, I think the individual investor takeaway from Swensen is that individual investors should use a passive strategy and invest in traditional assets... that if you did want to be an active investor, the first thing you'd need to do is move into alternative assets... but that in reality, succeeding with alternative assets is going to be a long-shot for anyone except a giant institutional investor and a giant risk as compared to traditional assets.

You said he "beat the stock market" by "investing in alternative assets."  All I'm saying is that his outperformance could have had more to do with the fact that the alternative assets outperformed stocks, and little or nothing to do with Swensen's skills as an active manager of those alternative assets.

Sorry, I must not be making myself clear.

Here's what I tried to say... Individual investors can't beat the traditional asset class "market".. And basically nobody else can either if you look at the data.

In alternative asset class markets, things look even worse because most people do poorly (e.g., median private equity returns might be zero or negative over extended periods of time).. but the top quartile does really well compared to both the median alternative asset return and the median traditional asset return.

FWIW, I've been recommending passive investing in my books for more than two decades. It really is an optimal strategy. (I kind of think you think I don't think that...)

But if someone does want to look at beating the market, at earning alpha, it seems pretty clear the data says, essentially, "Well, your chances are slim.... but you'll need to be a top quartile investor investing in alternative assets."


Roland of Gilead

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Re: Another "beating the market" thread
« Reply #15 on: February 20, 2017, 05:36:39 PM »
Buffett has beat the market for decades, so I guess if you had invested in him, you would have proved that a person can beat the index funds.

bacchi

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Re: Another "beating the market" thread
« Reply #16 on: February 20, 2017, 06:54:55 PM »
Buffett has beat the market for decades, so I guess if you had invested in him, you would have proved that a person can beat the index funds.

There are a couple of reasons that Buffet can beat the market but one of them is float. Simplistically, he gets a really cheap margin loan that can be used to invest ("borrow" at 0%, invest at 7%.)

SeattleCPA

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Re: Another "beating the market" thread
« Reply #17 on: February 21, 2017, 02:17:25 PM »
Buffet's market beating returns, according to some, were due to leverage:

http://www.economist.com/node/21563735

Further, what we need to know if we want to beat the market over next two or three decades, obviously, is who the next Warren Buffet is...

Car Jack

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Re: Another "beating the market" thread
« Reply #18 on: February 22, 2017, 01:09:11 PM »
Apples and oranges.  Did you look at the Dunn expenses?  They run as a hedge fund.  25% of all profits.  When you lose money, they don't appear to get paid.