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Learning, Sharing, and Teaching => Investor Alley => Topic started by: getmoneyeatpizza on January 15, 2015, 05:20:57 PM

Title: bet lunch VTSAX would beat friend's trading. my chances?
Post by: getmoneyeatpizza on January 15, 2015, 05:20:57 PM
Today I bet a friend lunch a year from now that VTSAX would beat said friend's trading over 2015. Any thoughts on my chances? I know its probably a better 5 year bet but figured it would be interested to track.
Title: Re: bet lunch VTSAX would beat friend's trading. my chances?
Post by: trailrated on January 15, 2015, 05:28:21 PM
About 80% I would guess, make sure you count all the trading fees/taxes etc. they incur as well.
Title: Re: bet lunch VTSAX would beat friend's trading. my chances?
Post by: looking for FI on January 15, 2015, 05:35:47 PM
Are they picking individual stocks, or investing in etfs and funds?
Title: Re: bet lunch VTSAX would beat friend's trading. my chances?
Post by: surfhb on January 15, 2015, 05:48:32 PM
Thats a poor bet.   A blind, retarded monkey could beat the market in this investing environment.

Should have bet him your returns of 20--30 years :)
Title: Re: bet lunch VTSAX would beat friend's trading. my chances?
Post by: getmoneyeatpizza on January 15, 2015, 06:05:39 PM
they are picking and trading individual stocks
Title: Re: bet lunch VTSAX would beat friend's trading. my chances?
Post by: YoungInvestor on January 15, 2015, 06:10:57 PM
Meh.

Depends on the guy, but on a short term basis, my moneywould be on him.. You'd need to account for the same transaction fees that they encounter.
Title: Re: bet lunch VTSAX would beat friend's trading. my chances?
Post by: looking for FI on January 15, 2015, 07:34:53 PM
With the consistant run of both bio tech and utilities picking stocks is relatively easy right now. The energy sector is weighing down the index, my money would be on him.
Title: Re: bet lunch VTSAX would beat friend's trading. my chances?
Post by: innerscorecard on January 15, 2015, 07:43:59 PM
Likely your friend, if he takes on more risk, but the risk does not materialize. Or if his trading is somewhat market neutral, and the broad market tanks. A lot of scenarios where he could end up beating the market in such a short time-frame.
Title: Re: bet lunch VTSAX would beat friend's trading. my chances?
Post by: ScroogeMcDutch on January 16, 2015, 06:01:59 AM
This is very counterintuitive. A lot of people here favor index investing, and should be saying the odds are with OP. Unless you believe individual stock pickers tend to soar high, but fall extremely low.
Title: Re: bet lunch VTSAX would beat friend's trading. my chances?
Post by: johnny847 on January 16, 2015, 06:13:37 AM
This is very counterintuitive. A lot of people here favor index investing, and should be saying the odds are with OP. Unless you believe individual stock pickers tend to soar high, but fall extremely low.
No it's not. The only thing index investing with broad market funds (ie, funds such as VTSAX) is just a bit under market returns (because of the expense ratio). Over long time frames, generally speaking, an index does better than a stock picker, because it is generally speaking hard to consistently pick stocks well over the long term. However, over a short time frame, a stock picker could just get lucky. Which is in line with the last part of your statement.
Look at the .com bubble. You basically could not lose money by investing in tech companies at that time (until, of course, the bubble burst). But a broad market index fund such as VTSAX would definitely have lost to a stock picker who just picked tech companies. I'm not saying that we are experiencing a bubble right now, but at least some people here believe that there is bubbly behavior in certain sectors of the market that can be exploited (or conversely, certain sectors are weighing down the index, so not investing in those sectors will lead to an advantage).

I probably wouldn't have made this bet - not because I don't believe in index investing - but because if the friend wins, he or she is going to become more sure that he or she is able to pick winning stocks consistently (which again, maybe the OP's friend does actually know what he or she is doing. There are certainly people such as Warren Buffet or Peter Lynch who have outperformed the market. But chances are that's not the case).
Title: Re: bet lunch VTSAX would beat friend's trading. my chances?
Post by: DoubleDown on January 16, 2015, 08:04:04 AM
I'd say your odds, just in terms of share prices, are 50-50. Definitely include fees and taxes to make it apples/apples. Lots of churn could generate a lot of fees and short term capital gains taxes, and those alone could make you the winner.
Title: Re: bet lunch VTSAX would beat friend's trading. my chances?
Post by: Indexer on January 16, 2015, 08:15:44 PM
Quote
Thats a poor bet.   A blind, retarded monkey could beat the market in this investing environment.

Should have bet him your returns of 20--30 years :)

Well sure, we already know that monkeys are the best stock pickers.  ;)  Monkeys that have picked stocks in the past normally do outperform over long periods.  They pick randomly so they have no judgement and they normally pick smaller companies no one has ever heard of or researched because that is what most of the market is made up in terms of the number of stocks. 

However most intelligent human beings with eyesight fail epically at that.  They try to use logic.  They tend to pick big companies they have heard of or companies they hear others talking about.  They let market conditions dictate their decisions.  They make lots of trades because their brains emotions tell them to.  Why are APPLE and TESLA talked about on every single finance forum in the world... even index focused forums... but we all know there is some tiny company out there that will outperform both that no one is talking about?  Because humans are bad at this.....

Yea I bet my money on the monkey.  All the monkey is doing is creating his own random Index fund that tilts small/micro-cap that he will never touch.  As long as it is well diversified he will probably do great.  Humans on the other hand really suck at this.  ;)

Most stock pickers underperformed the total stock index in 2014 and 2013.  So statistically you made a great bet.  I would wager the odds are 60/40 in your favor.  You might lose this year, but if you repeat the bet every year you will net some free food.
Title: Re: bet lunch VTSAX would beat friend's trading. my chances?
Post by: brandino29 on January 16, 2015, 10:34:56 PM
I probably wouldn't have made this bet - not because I don't believe in index investing - but because if the friend wins, he or she is going to become more sure that he or she is able to pick winning stocks consistently (which again, maybe the OP's friend does actually know what he or she is doing. There are certainly people such as Warren Buffet or Peter Lynch who have outperformed the market. But chances are that's not the case).

This was my thought as well.  So you lose $10 on lunch, who cares, but now you have to listen to him gloat about how easy it is to beat the market and anytime you try to bring him down he'll tell you all about "that one year when we made that bet."
Title: Re: bet lunch VTSAX would beat friend's trading. my chances?
Post by: EarlyStart on January 17, 2015, 01:13:09 AM
I'd bet on you. Last year (and most years) a vast majority of active funds lose to the index, so assuming your friend is the near the median, VTSAX is a safer bet. Active management sucked in 2014. I'd bet 2015 will be the same, but we'll see.
Title: Re: bet lunch VTSAX would beat friend's trading. my chances?
Post by: milesdividendmd on January 17, 2015, 01:21:35 AM
The odds are with you.

Warren Buffett famously bet on the S&P 500 against hedge funds, and he wins most individual years.  And all  long periods.

To make it truly fair you should match your index with his trading style. For instance if he is a value trader, you should take a Vanguard value fundů

But even if you don't, you will probably win.

By the way, the correct way to perform this bet is to each put $1000 in  brokerage account, at the start of the bet, and forbid any deposits or withdrawals.

Avoiding trading costs is why indexing wins most of the time.

Title: Re: bet lunch VTSAX would beat friend's trading. my chances?
Post by: Dodge on January 17, 2015, 09:43:17 AM
By the way, the correct way to perform this bet is to each put $1000 in  brokerage account, at the start of the bet, and forbid any deposits or withdrawals.

Yes.  Most people have no clue how to properly calculate returns, especially when deposits/withdrawals are put in the mix.

If you can't control for your friend's deposits/withdrawals, here's a fun calculator to help:

http://www.moneychimp.com/features/portfolio_performance_calculator.htm

Edit:  The moneychimp calculator above, is a rough estimate.  If your friend has made deposits/withdrawals, you need to calculate the XIRR for the internal rate of return.  Only then can you compare it to VTSAX.  You can google "XIRR calculator" to find prebuilt Excel spreadsheets for this, or use an online calculator.  Here's a good one:

http://www.free-online-calculator-use.com/xirr-calculator.html

Good luck!
Title: Re: bet lunch VTSAX would beat friend's trading. my chances?
Post by: innerscorecard on January 17, 2015, 11:11:31 PM
XIRR is what I use to calculate my own investment returns,  but to properly compare something to mutual fund reported returns, you need to be calculating Time Weighted Returns, which is what mutual funds report in.
Title: Re: bet lunch VTSAX would beat friend's trading. my chances?
Post by: Static Void on January 18, 2015, 12:11:09 AM
I'd say your odds, just in terms of share prices, are 50-50.

+1

With every hand-picked trade, someone buys and someone sells. Someone wins a little, and someone loses a little (sort-of). The overall market should be right in the middle. I think 50/50 is mathematically close.
Title: Re: bet lunch VTSAX would beat friend's trading. my chances?
Post by: Dodge on January 18, 2015, 04:13:47 PM

XIRR is what I use to calculate my own investment returns,  but to properly compare something to mutual fund reported returns, you need to be calculating Time Weighted Returns, which is what mutual funds report in.

Thanks for the tip! Here's a good time-weighed calculator, it's much more simple than the XIRR calculator I referenced above :)

http://www.rateofreturnexpert.com/time-weighted-return-calculator/
Title: Re: bet lunch VTSAX would beat friend's trading. my chances?
Post by: milesdividendmd on January 18, 2015, 06:24:22 PM
I'd say your odds, just in terms of share prices, are 50-50.

+1

With every hand-picked trade, someone buys and someone sells. Someone wins a little, and someone loses a little (sort-of). The overall market should be right in the middle. I think 50/50 is mathematically close.

This ignores trading costs, friction, and assumes that all traders are equally adept.  Most amature's (like us) are "dumb money."

long term, the odds are more like 20/80 for the friend's success, or less.
Title: Re: bet lunch VTSAX would beat friend's trading. my chances?
Post by: DoubleDown on January 20, 2015, 11:08:09 AM
I'd say your odds, just in terms of share prices, are 50-50.

+1

With every hand-picked trade, someone buys and someone sells. Someone wins a little, and someone loses a little (sort-of). The overall market should be right in the middle. I think 50/50 is mathematically close.

This ignores trading costs, friction, and assumes that all traders are equally adept.  Most amature's (like us) are "dumb money."

long term, the odds are more like 20/80 for the friend's success, or less.

But this isn't long term, the bet is for one year from now. And my original quote specified just share prices, ignoring fees, trading costs, etc. As Static Void said, the odds are pretty close to even that the market will likely be right around the middle of his friend's trades, assuming his friend doesn't make some outrageous or strange picks to skew the result.
Title: Re: bet lunch VTSAX would beat friend's trading. my chances?
Post by: milesdividendmd on January 20, 2015, 11:13:42 AM
Comparing active trading to passive indexing while ignoring trading costs is akin to comparing the speed of a bicycle to the speed of a motorcycle while ignoring the effects of internal combustion.

That being said, even ignoring trading costs, over the course of a year the indexer is still favored relative to the average amateur day trader.
Title: Re: bet lunch VTSAX would beat friend's trading. my chances?
Post by: James on January 20, 2015, 11:15:07 AM
It's a good bet, just be sure to double down if he wins... :D