Beware the snake oil as the market gets tougher

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
Krui24
Posts: 76
Joined: Tue Aug 11, 2015 3:17 pm

Beware the snake oil as the market gets tougher

Post by Krui24 »

I just went to a presentation put on by a manager from a major, reputable investment house. He was articulate, knowledgeable, and confident.

His overall premise is that for the last 6 years or so, any monkey could make money in the market just by owning the market (i.e. indexing). For the next decade, goes his logic, returns will be lower and only those who actively manage will come out ahead. He must have repeated the phrases "actively manage" and "concentrated positions" fifteen times. His analogy is that buying the indexes is like buying a McDonalds Big Mac- you get the bun, lettuce, cheese & special sauce whether you want them or not. Active investors, on the other hand, can skip the cheese and the bun. All of this was backed up by a wealth of data where they, the prescient and disciplined wizards, had out-maneuvered the lemmings of the market (i.e. the indexers).

I'm sure I'm preaching to the choir here, however I wanted to sound a warning. I agree we are probably entering an age of generally lower returns. It will be tempting, even to disciplined Bogleheads, to seek higher returns by market timing, sector bets, yield chasing, and active management (and forget about the associated higher fees, higher taxes, higher risk, and questionable outcome of doing so).

Snake oil, even if packaged in a beautiful crystal vase and presented by a supermodel, is still snake oil. Don't buy it.
bdpb
Posts: 1622
Joined: Wed Jun 06, 2007 3:14 pm

Re: Beware the snake oil as the market gets tougher

Post by bdpb »

Krui24 wrote:His analogy is that buying the indexes is like buying a McDonalds Big Mac- you get the bun, lettuce, cheese & special sauce whether you want them or not. Active investors, on the other hand, can skip the cheese and the bun.
Skip the cheese and bun and get a hamburger with a big bite taken out already. :D
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 5:18 pm

Re: Beware the snake oil as the market gets tougher

Post by Phineas J. Whoopee »

Nice first post, Kuri24.

I agree it's a danger, but disagree there's significantly more of it. The salespeople will always sell, using whatever pitch they think will work, and now that indexing is becoming popular, or at least better-known, the ones who sell active management have to say it was a reasonably effective choice before (calling one's prospects stupid is bad for sales), but things are different today (you hear every mother say, you just don't appreciate a mother's pain).

I remember a television commercial from years ago. I don't even recall what it was advertising, but I do remember the first words, in a nasally-midwestern voice (not all midwestern voices are nasal, but this one so thoroughly was I'm sure it must have been a deliberate choice called for by the director): I'm a mom, and in these uncertain times ...

Under what economic circumstances couldn't a commercial for pretty much anything begin with those words?

PJW
Leeraar
Posts: 4109
Joined: Tue Dec 10, 2013 7:41 pm
Location: Nowhere

Re: Beware the snake oil as the market gets tougher

Post by Leeraar »

He just happens to be wrong.

Indexing beats most active managers and investors because most of the advance is concentrated in a few stocks. This year, for example, if you did not pick Google and Amazon, you are likely trailing the indexes significantly. It's a myth that active investing is better because it avoids the dogs.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
User avatar
Raybo
Posts: 2244
Joined: Tue Feb 20, 2007 10:02 am
Location: San Francisco
Contact:

Re: Beware the snake oil as the market gets tougher

Post by Raybo »

Why would anyone want a Big Mac without the bun and cheese?
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.
User avatar
Boglenaut
Posts: 3509
Joined: Mon Mar 23, 2009 7:41 pm

Re: Beware the snake oil as the market gets tougher

Post by Boglenaut »

Krui,

Interesting first post.
lack_ey
Posts: 6701
Joined: Wed Nov 19, 2014 10:55 pm

Re: Beware the snake oil as the market gets tougher

Post by lack_ey »

Well, okay, if the market gains 15% then a 10% return target is pretty doable. If the market gains 5% then you're not getting 10% by indexing it, and yet some investors will in fact get 10% or better. That much is obvious. But only those who actively manage beat the market in any environment, so this is nothing special.

Some of the active managers will always outperform, some net of fees. Most will attribute this in some part to skill. It may in part be.

Anyway, the propaganda wars for AUM and investment manager profits will always wage on.
User avatar
prudent
Moderator
Posts: 9085
Joined: Fri May 20, 2011 2:50 pm

Re: Beware the snake oil as the market gets tougher

Post by prudent »

Local news/talk radio stations now have lots of ads for annuity sellers (although they never use the word).

Announcer: "One day the market is up, the next day it drops like a rock. You can't afford to lose what you've worked so hard to save. Wouldn't you like to earn a guaranteed 7%? Yes, 7% for income purposes..."
User avatar
Maynard F. Speer
Posts: 2139
Joined: Wed Mar 18, 2015 10:31 am

Re: Beware the snake oil as the market gets tougher

Post by Maynard F. Speer »

If you look at 2000's Tech Crash, the broad indexes fell hard, while many active funds (including smart-beta, value, etc) made positive returns

In the UK, average active funds have beaten the market over every period (1, 3, 5 and 10 years) this century, with my own top holdings (with Neil Woodford and Giles Hargreave) beating the market by 4-6x

Of course it was a sales pitch - but that doesn't mean there isn't some truth in it ... Valuations wise, indexes are looking pricy because so much cash has been pushed into them .. Active funds only represent about 1/3rd of the market - and they have got the option of avoiding overvalued sectors (as many did in 2000) and dangerous sectors (UK outperformance has been explained by many avoiding energy firms and banks) .. But if we're back to QE in a year's time, indexes will probably be the place to be
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes
UncleBen
Posts: 325
Joined: Wed Feb 19, 2014 7:43 pm

Re: Beware the snake oil as the market gets tougher

Post by UncleBen »

Oh come on, pay them double the price for a few slices of bacon.
Grt2bOutdoors
Posts: 25625
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Beware the snake oil as the market gets tougher

Post by Grt2bOutdoors »

Krui24 wrote:I just went to a presentation put on by a manager from a major, reputable investment house. He was articulate, knowledgeable, and confident.

Snake oil, even if packaged in a beautiful crystal vase and presented by a supermodel, is still snake oil. Don't buy it.
Now that's an oxymoron if I've ever heard one "a major reputable investment house". There are no "reputable" investment houses - there are only businesses that seek to separate you from your money and place it in their pockets so they can move on to their next mark.
"Snake oil, even if packaged in a beautiful crystal vase and presented by a supermodel, is still snake oil". "Don't buy it" - is right!
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
User avatar
marathonwmn
Posts: 156
Joined: Tue Jul 01, 2008 1:15 pm
Location: West of the Atlantic

Re: Beware the snake oil as the market gets tougher

Post by marathonwmn »

Raybo wrote:Why would anyone want a Big Mac without the bun and cheese?
Someone who has gluten and lactose intolerances?? I'm not speaking of myself, mind you... bring on the bun, bring on the cheese! :beer
The race goes not to the swift, but to those who keep on running. . .
User avatar
bertie wooster
Posts: 764
Joined: Mon Jun 25, 2007 5:14 pm

Re: Beware the snake oil as the market gets tougher

Post by bertie wooster »

Maynard F. Speer wrote:If you look at 2000's Tech Crash, the broad indexes fell hard, while many active funds (including smart-beta, value, etc) made positive returns
Yes, but the large majority of active funds fell hard as well. The fact is that right now, we have no idea which active funds will beat the market going forward, just as in 1998 no one had any idea which funds would beat the market.

So are there active funds that will beat the market? You bet. Can we take advantage of that - I don't think so. I have no idea what goes on in the UK, but I suspect the situation is similar.
skepticalobserver
Posts: 1116
Joined: Tue Jul 29, 2014 11:29 am

Re: Beware the snake oil as the market gets tougher

Post by skepticalobserver »

Apropos of snake oil pitches, this is from today's White Coat Investor,"10 Sales Tactics From The Financial Services Industry" http://whitecoatinvestor.com/10-sales-t ... -industry/
User avatar
David Jay
Posts: 14586
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Beware the snake oil as the market gets tougher

Post by David Jay »

prudent wrote:Local news/talk radio stations now have lots of ads for annuity sellers (although they never use the word).

Announcer: "One day the market is up, the next day it drops like a rock. You can't afford to lose what you've worked so hard to save. Wouldn't you like to earn a guaranteed 7%? Yes, 7% for income purposes..."
You mean:
The "Wall Street Casino"
You will "never lose a penny"
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
User avatar
David Jay
Posts: 14586
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Beware the snake oil as the market gets tougher

Post by David Jay »

prudent wrote:Local news/talk radio stations now have lots of ads for annuity sellers (although they never use the word).

Announcer: "One day the market is up, the next day it drops like a rock. You can't afford to lose what you've worked so hard to save. Wouldn't you like to earn a guaranteed 7%? Yes, 7% for income purposes..."
...don't forget "Wall Street Casino"
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
jdb
Posts: 1759
Joined: Wed Dec 05, 2012 7:21 pm

Re: Beware the snake oil as the market gets tougher

Post by jdb »

You could have saved yourself the trip to the presentation, just wait until the Edward Jones rep rings your doorbell. Same pitch. And probably a neighbor. Hope that you got a free lunch for having to sit through the presentation, or at least a ballpoint pen.
User avatar
Maynard F. Speer
Posts: 2139
Joined: Wed Mar 18, 2015 10:31 am

Re: Beware the snake oil as the market gets tougher

Post by Maynard F. Speer »

bertie wooster wrote:Yes, but the large majority of active funds fell hard as well. The fact is that right now, we have no idea which active funds will beat the market going forward, just as in 1998 no one had any idea which funds would beat the market.

So are there active funds that will beat the market? You bet. Can we take advantage of that - I don't think so. I have no idea what goes on in the UK, but I suspect the situation is similar.
If I were in the US, I'd invest in the best managers with the most resources (preferably who own their own firms and charge low fees) .. So Warren Buffett would be an obvious choice - and would have been an obvious choice when I started investing

In the UK it's easy .. Neil Woodford is our equivalent of Warren Buffett - he set up his own fund house, I invested at launch, it's beaten the market by 6x .. Giles Hargreave is a very easy manager to pick (as he's much better resourced than other fund houses) .. Admittedly, picking active funds out of a hat would have most likely worked out well for you, as our main index is are poorly diversified, and underperforms the active fund sector over every period to 10 years now

I know EMH pushers try to make the process look difficult, but if you can just filter out high fund charges and closet trackers, even in the US, active slightly edges it .. And any decent fund platform's recommendations should do that for you .. A new fund I invested in that I expect to outperform is called Miton UK Value (I've picked this on fundamental analysis - so if I'm wrong, it'll be a lesson to stick to the old format) .. Might be interesting to see how it does going forwards
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes
User avatar
HomerJ
Posts: 21281
Joined: Fri Jun 06, 2008 12:50 pm

Re: Beware the snake oil as the market gets tougher

Post by HomerJ »

Maynard F. Speer wrote:If you look at 2000's Tech Crash, the broad indexes fell hard, while many active funds (including smart-beta, value, etc) made positive returns
What is many? Is that most? More than half? Pretty important adjective there.

What percentage of funds made a positive return during 2000-2002? (Not just fell less than the indexes... you said "positive returns"). Did more than half of active funds make a positive return during 2000-2002?

Now, did most of those funds who made a positive return during 2000-2002 ALSO beat the indexes from 1995-2000? Because I'm guessing many of them were invested expecting a downturn, and although they did well in 2000-2002, they probably did pretty poorly from 1995-2000 as the market defied their predictions and kept going up...

So, here's another question... What percentage of active funds beat the appropriate index fund from 1995-2002? I'm even giving you an end-point with a crash... I bet the number is even smaller if you look at 1995-2005.
User avatar
HomerJ
Posts: 21281
Joined: Fri Jun 06, 2008 12:50 pm

Re: Beware the snake oil as the market gets tougher

Post by HomerJ »

Maynard F. Speer wrote:If I were in the US, I'd invest in the best managers
Oh, that's easy then... Just invest with the best managers!

Hmm... how do we determine that? Do we just pick the ones with the best 10-year record? Maybe the ones who get the most press?

Go back to 2005 and look at the list of managers who had the best 10-year record at that time (1995-2005).

Now, find out how many outperformed the appropriate index over the next 10 years (2005-2015).

I bet it's less than half. I wouldn't be surprised if it was less than 20%.
In the UK it's easy .. Neil Woodford is our equivalent of Warren Buffett - he set up his own fund house, I invested at launch. it's beaten the market by 6x.
Wait, this is the fund that opened in like April 2015? I couldn't tell right away with a quick search, and don't care enough to look farther.

This is your proof that picking an active fund is easy?

And your "beaten the market by 6x" is pretty disingenuous. That sounds really good, and yes, 12% in 4 months is 6x the index's 2% in 4 months, but are you really claiming that 4 months is a track record that proves anything at all?
User avatar
HomerJ
Posts: 21281
Joined: Fri Jun 06, 2008 12:50 pm

Re: Beware the snake oil as the market gets tougher

Post by HomerJ »

Here's a fun one from 2005...

http://www.forbes.com/free_forbes/2005/0919/208.html
Astute maneuvers like these place Calamos Growth first on our Honor Roll for the third straight year, in a period when small-company and value-oriented funds have romped. This fund has returned an annualized 21% over ten years, twice the rise in the S&P500. The showings are so spectacular they overwhelm the drain on investors' returns from its 4.75% upfront sales load.
That was in 2005.

Since 2005? They did okay, but not as good as the S&P 500. "First on the Honor Roll for three years straight" in 2005.

Image
User avatar
Maynard F. Speer
Posts: 2139
Joined: Wed Mar 18, 2015 10:31 am

Re: Beware the snake oil as the market gets tougher

Post by Maynard F. Speer »

What's wrong with Warren Buffett? Carl Icahn? Bruce Berkowitz?

In the UK, because of expenses, we all invest in the US indexes - so I'm not up to speed on what's available over there .. But I knew I wanted to invest with Warren Buffett when I had my first bank account - I don't buy the EMH argument that his subsequent outperformance has been some kind of 'five-sigma' event

I also don't buy that counting active funds is the way to measure collective performance .. Almost every UK investor you'll meet has had money with Neil Woodford since the 80s - he's a huge chunk of the whole active fund industry over here .. He sailed through the tech crisis - I don't care if 3 dozen funds with names like UK Dynamic Alpha Diversified Opportunities, run by someone I've never heard of, managing £5 million, didn't .. I don't know why people invest in funds like that (unless they're convinced by shady IFAs)
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes
User avatar
Maynard F. Speer
Posts: 2139
Joined: Wed Mar 18, 2015 10:31 am

Re: Beware the snake oil as the market gets tougher

Post by Maynard F. Speer »

Here's a fun one

Simply discount funds with unreasonable fees and active ranks marginally higher (with Vanguard, unsurprisingly, leading the pack by some way)

Image
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes
Twins Fan
Posts: 2775
Joined: Fri Mar 08, 2013 12:02 pm

Re: Beware the snake oil as the market gets tougher

Post by Twins Fan »

HomerJ wrote:Here's a fun one from 2005...

http://www.forbes.com/free_forbes/2005/0919/208.html
Astute maneuvers like these place Calamos Growth first on our Honor Roll for the third straight year, in a period when small-company and value-oriented funds have romped. This fund has returned an annualized 21% over ten years, twice the rise in the S&P500. The showings are so spectacular they overwhelm the drain on investors' returns from its 4.75% upfront sales load.
That was in 2005.

Since 2005? They did okay, but not as good as the S&P 500. "First on the Honor Roll for three years straight" in 2005.

Image
So, 2005 would have been exactly the wrong time to jump into the Calamos fund then???

That's the problem with picking the active funds. By the time they make #1 on the list for so many years in a row, that is pretty much exactly when people shouldn't jump on board. But, folks do anyways. They're about to become too big for their britches and basically become an index fund of their own, or under perform the index.

Those that were in the Calamos fund prior to 2005 probably did pretty well. But, I would say that was basically luck as they did not know beforehand that was going to be the hot fund until 2005.

It's always easy to find the hot funds looking at the past. :D :wink:
Twins Fan
Posts: 2775
Joined: Fri Mar 08, 2013 12:02 pm

Re: Beware the snake oil as the market gets tougher

Post by Twins Fan »

And, Warren Buffett is a fund manager??? :confused
User avatar
Maynard F. Speer
Posts: 2139
Joined: Wed Mar 18, 2015 10:31 am

Re: Beware the snake oil as the market gets tougher

Post by Maynard F. Speer »

It's this obsession with the short-term that derails people

The media makes you doubt a fund manager (or a region, or a factor tilt) if it "underperforms" for a year .. "Has Buffett lost his touch!?", "Has Value stopped working!?", "Is the US in a bear market!?" .. It awards stars for single year performance - even quarterly performance .. It's just not how investing works

If you're going to pick an active fund, pick it because of its fees, its manager, its resources, and maybe its fundamentals - likewise if you're picking a factor-tilted fund: don't just chase past performance .. make an intelligent decision and stick with it
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes
Twins Fan
Posts: 2775
Joined: Fri Mar 08, 2013 12:02 pm

Re: Beware the snake oil as the market gets tougher

Post by Twins Fan »

Well, no. It's looking at the long term that one realizes even the hot active fund isn't going to stay hot forever.

Looking at the short term leads to performance chasing.
User avatar
stratton
Posts: 11085
Joined: Sun Mar 04, 2007 4:05 pm
Location: Puget Sound

Re: Beware the snake oil as the market gets tougher

Post by stratton »

Krui24 wrote:His overall premise is that for the last 6 years or so, any monkey could make money in the market just by owning the market (i.e. indexing). For the next decade, goes his logic, returns will be lower and only those who actively manage will come out ahead. He must have repeated the phrases "actively manage" and "concentrated positions" fifteen times. His analogy is that buying the indexes is like buying a McDonalds Big Mac- you get the bun, lettuce, cheese & special sauce whether you want them or not. Active investors, on the other hand, can skip the cheese and the bun. All of this was backed up by a wealth of data where they, the prescient and disciplined wizards, had out-maneuvered the lemmings of the market (i.e. the indexers).
That's a long-winded way of saying, "It's a stock picker's market."

It's always a "stock picker's market" whatever the market conditions.

Paul
...and then Buffy staked Edward. The end.
User avatar
Maynard F. Speer
Posts: 2139
Joined: Wed Mar 18, 2015 10:31 am

Re: Beware the snake oil as the market gets tougher

Post by Maynard F. Speer »

Twins Fan wrote:Well, no. It's looking at the long term that one realizes even the hot active fund isn't going to stay hot forever.

Looking at the short term leads to performance chasing.
Neither are stocks - like every asset class and factor tilt, performance comes and goes over often long periods .. Stocks have only really been "hot" since we had two world wars and a global depression .. So far this century, returns have been quite weak .. Another correction, and alternative finance could easily take over as the "hot" asset class (when people can earn a steady 10% in P2P lending, for example)

As Bogle said, it's not about active vs passive, it's about fees .. When you decide to invest in the stock market, you weigh up knowns vs unknowns .. Fees are a pretty reliable known .. Good management might be a pretty reliable known too .. Indeed, Bogle isn't put off investing in his own son's Bogle Small Cap Growth fund - both highly active and comfortably outperforming

Malkiel made the same decision to have 30% of his portfolio in active funds .. All you need to do is give yourself the best odds
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes
User avatar
vitaflo
Posts: 1905
Joined: Sat Sep 03, 2011 3:02 pm

Re: Beware the snake oil as the market gets tougher

Post by vitaflo »

Krui24 wrote: I'm sure I'm preaching to the choir here, however I wanted to sound a warning. I agree we are probably entering an age of generally lower returns.
I'm beginning to think that with a lot of people so sure we're going to get lower returns moving forward that it means we're about to have a bull market the likes of which we've never seen before.

Only cuz, you know, the talking heads almost are always wrong in their predictions.
User avatar
Yesterdaysnews
Posts: 964
Joined: Sun Sep 14, 2014 1:25 pm
Location: Sugar Land, TX

Re: Beware the snake oil as the market gets tougher

Post by Yesterdaysnews »

There are some high quality fund shops that consistently beat their benchmarks - such as Artisan funds. Other fund shops may have strneth in one area of investing, such as Mathews for emerging. Alternative funds such as AQR products are also very interesting investments and were not around 10 or 20 years ago - nobody can predict how these funds may do compared to vanilla index funds going forward.

I believe in some areas of a portfolio there can be a role for active funds. I use index funds for my large cap US stock allocation however.
john94549
Posts: 4638
Joined: Tue Jul 26, 2011 8:50 pm

Re: Beware the snake oil as the market gets tougher

Post by john94549 »

Seriously, I've made more in my trading account this year with well-placed bets than those hedgies. As Mr. Market was flat for the year, I was up 4%. Mind you, I had but 45% in cash in my trading account. I did tend to whack off profits as they appeared. As they say "never let green fade to red."
User avatar
Maynard F. Speer
Posts: 2139
Joined: Wed Mar 18, 2015 10:31 am

Re: Beware the snake oil as the market gets tougher

Post by Maynard F. Speer »

I made more with a simple trend-following strategy than any of my absolute return funds have made .. But they're a lot less stress to hold

That's perhaps fund size, for you .. As Buffett said: “it's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”

http://buffettfaq.com/#according-to-a-b ... ifferently
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes
User avatar
zaboomafoozarg
Posts: 2431
Joined: Sun Jun 12, 2011 12:34 pm

Re: Beware the snake oil as the market gets tougher

Post by zaboomafoozarg »

Raybo wrote:Why would anyone want a Big Mac without the bun and cheese?
Atkins diet?

The "Atkins Allocation", now that's catchy.
heyyou
Posts: 4461
Joined: Tue Feb 20, 2007 3:58 pm

Re: Beware the snake oil as the market gets tougher

Post by heyyou »

When I started investing, thirty years passed before I withdrew any of my contributions. What funds were the best performers for that period? How would I identify the future good performers during that period?
Post Reply