What percent of Managers beat the market BEFORE fees?

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andysnp
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What percent of Managers beat the market BEFORE fees?

Post by andysnp » Sun Dec 02, 2018 10:58 am

What percent of Managers beat the market before they charge their Fees?

According to Bogleheads books, and it seems like it's somewhere between 80%-96% of Managers can't beat the market, but is this before fees or after fees?

Anyone have data of how Managers do in 10 year, 20 year, and 30 year timelines? Is data before fees or after fees? I know the longer the timeline, the more likely they are to lose.

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Re: What percent of Managers beat the market BEFORE fees?

Post by vineviz » Sun Dec 02, 2018 11:17 am

andysnp wrote:
Sun Dec 02, 2018 10:58 am
What percent of Managers beat the market before they charge their Fees?
According to S&P research, about 20% of U.S. domestic equity funds beat the market before fees. It drops to 12% after fees.

https://us.spindices.com/documents/rese ... debate.pdf
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Re: What percent of Managers beat the market BEFORE fees?

Post by oldcomputerguy » Sun Dec 02, 2018 11:20 am

andysnp wrote:
Sun Dec 02, 2018 10:58 am
What percent of Managers beat the market before they charge their Fees?
Given that it is not possible to invest in their funds without paying their fees, I'm not sure why that matters. Aren't our returns that we put in our pockets always after costs and fees?
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"The Arithmetic of Active Management"

Post by Taylor Larimore » Sun Dec 02, 2018 11:34 am

andysnip:

Welcome to the Bogleheads Forum!

Professor WIlliam Sharpe, a Nobel Laureate, helps answer your question in his famous THE ARITHMETIC OF ACTIVE MANAGEMENT

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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siamond
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Re: What percent of Managers beat the market BEFORE fees?

Post by siamond » Sun Dec 02, 2018 11:44 am

vineviz wrote:
Sun Dec 02, 2018 11:17 am
andysnp wrote:
Sun Dec 02, 2018 10:58 am
What percent of Managers beat the market before they charge their Fees?
According to S&P research, about 20% of U.S. domestic equity funds beat the market before fees. It drops to 12% after fees.

https://us.spindices.com/documents/rese ... debate.pdf
HUH? This doesn't seem to make much sense. The answer should be around 50%. What am I missing? Probably some extra fees that the S&P Global report didn't account for?

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Re: What percent of Managers beat the market BEFORE fees?

Post by deltaneutral83 » Sun Dec 02, 2018 11:52 am

siamond wrote:
Sun Dec 02, 2018 11:44 am
vineviz wrote:
Sun Dec 02, 2018 11:17 am
andysnp wrote:
Sun Dec 02, 2018 10:58 am
What percent of Managers beat the market before they charge their Fees?
According to S&P research, about 20% of U.S. domestic equity funds beat the market before fees. It drops to 12% after fees.

https://us.spindices.com/documents/rese ... debate.pdf
HUH? This doesn't seem to make much sense. The answer should be around 50%. What am I missing? Probably some extra fees that the S&P Global report didn't account for?
Example, there are ten managers in the large cap space, large cap returns returns 10% for a given amount of time. Eight managers return 9%, one manger returns 13% and one more returns 15%. 80% or 8 out of 10 underperform. The way managers underperform or outperform is not linear.

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Re: What percent of Managers beat the market BEFORE fees?

Post by siamond » Sun Dec 02, 2018 11:54 am

deltaneutral83 wrote:
Sun Dec 02, 2018 11:52 am
Example, there are ten managers in the large cap space, large cap returns returns 10% for a given amount of time. Eight managers return 9%, one manger returns 13% and one more returns 15%. 80% or 8 out of 10 underperform.
Yeah, ok, sure, an average isn't a median, but the law of large numbers should apply here...

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Re: What percent of Managers beat the market BEFORE fees?

Post by deltaneutral83 » Sun Dec 02, 2018 11:59 am

siamond wrote:
Sun Dec 02, 2018 11:54 am
deltaneutral83 wrote:
Sun Dec 02, 2018 11:52 am
Example, there are ten managers in the large cap space, large cap returns returns 10% for a given amount of time. Eight managers return 9%, one manger returns 13% and one more returns 15%. 80% or 8 out of 10 underperform.
Yeah, ok, sure, an average isn't a median, but the law of large numbers should apply here...
Bill Miller and Peter Lynch dominated well above the averages so for how well they did above the benchmarks, some other schmuck had to underpferform. Especially in Legg Mason's case where Miller not only beat the S&P over 15 years, he beat it every year, never down against it. So someone or someones had to collectively do that poorly for how well Miller did.

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Re: What percent of Managers beat the market BEFORE fees?

Post by vineviz » Sun Dec 02, 2018 12:12 pm

siamond wrote:
Sun Dec 02, 2018 11:54 am
deltaneutral83 wrote:
Sun Dec 02, 2018 11:52 am
Example, there are ten managers in the large cap space, large cap returns returns 10% for a given amount of time. Eight managers return 9%, one manger returns 13% and one more returns 15%. 80% or 8 out of 10 underperform.
Yeah, ok, sure, an average isn't a median, but the law of large numbers should apply here...
This particular statistic isn't asset-weighted (the question was what percent of managers beat the market). An asset-weighted average would undoubtedly be more favorable to active managers: the asset-weighted average fund performance was 50bps to 100bps closer to the benchmark for this period, depending on which equity category you looked at.

You also have non-fee costs (like translation costs associated with turnover) that are a bigger drag for active funds than passive funds. Even then, mutual funds (active and/or passive) don't add up to 100% of the market. You have retail stock investors, non-1940 Act vehicles (CEFs, UITs,etc.), and institutional investors (pension funds, endowments, SMAs, etc.).
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Re: What percent of Managers beat the market BEFORE fees?

Post by nisiprius » Sun Dec 02, 2018 12:15 pm

Most data, thanks I think to regulations, is after the expense ratio. (It doesn't include sales loads for load funds, or transaction costs).

It is my personal belief, just an impression, that many managers probably do have the skill to generate something like 0.5%/year in alpha through clever selection, but a) it's so small that it's hard to be sure, lost in the noise, depends on endpoints; b) I don't have the skill to identify those managers.

I did a small amount of personal exploration of performance before and after expenses, with one company's funds, in this thread: AQR fund family's performance relative to its benchmarks. I used AQR's own chosen benchmarks even though I believe a number of them to have used a completely bogus far-too-easy benchmark, Treasury bills. You can see charts in the thread. What I found was that
  • After expenses, 27% of the benchmarks were met by their funds, 73% were not met, and on the average, funds were -1.05% below their benchmarks.
  • Before expenses, 44% of the benchmarks were met by their funds, 56% were not met, and on the averages, funds were -0.03% below their benchmark.
In this case, then, the fund managers didn't do any worse than their benchmarks before expenses, but failed to add anything, either. You'd have been just as well off investing in index funds tracking the benchmarks as you would have been in AQR funds. After expenses, of course, you were worse off in the AQR funds.

The obvious next question is "can I develop the same skill myself, create 0.50% of increased returns for myself without taking any more risks, and pocket the alpha for myself?" my answers are: 1) I doubt it, 2) I definitely doubt that you can do it without putting in the equivalent of a forty-hour work week and investing in gotta-pay-for-them databases and information sources. Jim Cramer makes the IMHO-absurd claims that you can diversify adequately with just five stocks, and research them adequately spending in just an hour a week per stock. Even if it were true, it would mean you would be incurring expenses equal to 12.5% of your salary; if your portfolio were ten years' salary, that would mean a "personal expense ratio" of 1.25%.
Last edited by nisiprius on Sun Dec 02, 2018 12:19 pm, edited 1 time in total.
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Re: What percent of Managers beat the market BEFORE fees?

Post by cheese_breath » Sun Dec 02, 2018 12:18 pm

oldcomputerguy wrote:
Sun Dec 02, 2018 11:20 am
andysnp wrote:
Sun Dec 02, 2018 10:58 am
What percent of Managers beat the market before they charge their Fees?
Given that it is not possible to invest in their funds without paying their fees, I'm not sure why that matters. Aren't our returns that we put in our pockets always after costs and fees?
+1 Beat me to it.
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Re: What percent of Managers beat the market BEFORE fees?

Post by Kenkat » Sun Dec 02, 2018 12:21 pm

siamond wrote:
Sun Dec 02, 2018 11:44 am
vineviz wrote:
Sun Dec 02, 2018 11:17 am
andysnp wrote:
Sun Dec 02, 2018 10:58 am
What percent of Managers beat the market before they charge their Fees?
According to S&P research, about 20% of U.S. domestic equity funds beat the market before fees. It drops to 12% after fees.

https://us.spindices.com/documents/rese ... debate.pdf
HUH? This doesn't seem to make much sense. The answer should be around 50%. What am I missing? Probably some extra fees that the S&P Global report didn't account for?
I wonder if they are considering transactional costs of turnover in active funds. This might account for part of the difference.

If only 20% of active funds beat the market before fees, then somewhere there are other types of investors who are beating the market before fees in order for the arithmetic of active management to work. I don’t really believe this to be the case - at least not to this level so it seems something else is accounting for the shortfall.

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Re: What percent of Managers beat the market BEFORE fees?

Post by siamond » Sun Dec 02, 2018 12:33 pm

vineviz wrote:
Sun Dec 02, 2018 12:12 pm
This particular statistic isn't asset-weighted (the question was what percent of managers beat the market). An asset-weighted average would undoubtedly be more favorable to active managers: the asset-weighted average fund performance was 50bps to 100bps closer to the benchmark for this period, depending on which equity category you looked at.
Yeah, true, but it shouldn't make a big difference.
vineviz wrote:
Sun Dec 02, 2018 12:12 pm
You also have non-fee costs (like translation costs associated with turnover) that are a bigger drag for active funds than passive funds.
Yup, THAT is a good point, thank you. I am a little stunned this would shift the numbers from the theoretical 50% to something like 80% though...
vineviz wrote:
Sun Dec 02, 2018 12:12 pm
Even then, mutual funds (active and/or passive) don't add up to 100% of the market. You have retail stock investors, non-1940 Act vehicles (CEFs, UITs,etc.), and institutional investors (pension funds, endowments, SMAs, etc.).
No reason to make a difference, as long as it's a large enough sample.

Anyhoo, the OP is just asking a theoretical question with no practical application. So maybe we shouldn't beat this one to death. I was just curious... Thanks for sharing the S&P Global report.

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Re: "The Arithmetic of Active Management"

Post by TravelforFun » Sun Dec 02, 2018 12:45 pm

Taylor Larimore wrote:
Sun Dec 02, 2018 11:34 am
andysnip:

Welcome to the Bogleheads Forum!

Professor WIlliam Sharpe, a Nobel Laureate, helps answer your question in his famous THE ARITHMETIC OF ACTIVE MANAGEMENT

Best wishes.
Taylor
The article concludes that 'after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar' (bolded mine) which is of course true. The OP's question is what percentage of active managers beat the market.

TravelforFun
Last edited by TravelforFun on Sun Dec 02, 2018 12:58 pm, edited 1 time in total.

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Re: What percent of Managers beat the market BEFORE fees?

Post by grabiner » Sun Dec 02, 2018 12:57 pm

vineviz wrote:
Sun Dec 02, 2018 11:17 am
andysnp wrote:
Sun Dec 02, 2018 10:58 am
What percent of Managers beat the market before they charge their Fees?
According to S&P research, about 20% of U.S. domestic equity funds beat the market before fees. It drops to 12% after fees.

https://us.spindices.com/documents/rese ... debate.pdf
The appendix confirms that this is not a fair comparison. Any fund which closes is counted as having underperformed. While most funds which close do underperform, this is less likely to be the case after adjustment for fees; a fund which charges 2% expenses and undeperforms the index by 1% may still close.

The way to do a fair comparison would be to reallocate any closed fund to a random distribution of the remaining funds after its closing date. Thus, if a fund closed after three years, having underperformed the index by 1% annually, the probability that it would beat the index is the probability that a surviving fund would beat the index by 1.5% annually over the last two years. (This presumably corresponds to what investors do; if your small-cap value fund closes, you will probably find another small-cap value fund to invest the money in.)
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Re: What percent of Managers beat the market BEFORE fees?

Post by kolea » Sun Dec 02, 2018 1:10 pm

siamond wrote:
Sun Dec 02, 2018 11:54 am
deltaneutral83 wrote:
Sun Dec 02, 2018 11:52 am
Example, there are ten managers in the large cap space, large cap returns returns 10% for a given amount of time. Eight managers return 9%, one manger returns 13% and one more returns 15%. 80% or 8 out of 10 underperform.
Yeah, ok, sure, an average isn't a median, but the law of large numbers should apply here...
It is not that 50% (roughly) of managers will do better and 50% will do worse, it is that 50% of dollars invested will do better and 50% will do worse. The two are not the same unless all funds are of about the same size.
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Re: What percent of Managers beat the market BEFORE fees?

Post by snailderby » Sun Dec 02, 2018 1:24 pm

Some have asked why OP's question matters given that real-world returns are always after fees. Maybe OP's question could help those who are evaluating actively managed funds with relatively low fees (like Vanguard's Primecap Admiral fund, which has a 0.32% ER), or those who don't have many low-ER passive index fund options in their 401(k)s?

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Re: What percent of Managers beat the market BEFORE fees?

Post by bradpevans » Sun Dec 02, 2018 1:52 pm

siamond wrote:
Sun Dec 02, 2018 11:54 am
deltaneutral83 wrote:
Sun Dec 02, 2018 11:52 am
Example, there are ten managers in the large cap space, large cap returns returns 10% for a given amount of time. Eight managers return 9%, one manger returns 13% and one more returns 15%. 80% or 8 out of 10 underperform.
Yeah, ok, sure, an average isn't a median, but the law of large numbers should apply here...
I’m not convinced it works this way, unless the managers are forced to replicate an index

I could have a large cap fund with winners losers and those that hit the average. Or all winners one year

I’m not saying fund managers do this, I’m just saying there’s no reason to anchor the percent above average around 50% or any other percent - we don’t know what’s in those funds

The larger the fund (# of holdings) then yes it’s harder to beat the average but some volatility is removed

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Re: What percent of Managers beat the market BEFORE fees?

Post by MotoTrojan » Sun Dec 02, 2018 1:57 pm

oldcomputerguy wrote:
Sun Dec 02, 2018 11:20 am
andysnp wrote:
Sun Dec 02, 2018 10:58 am
What percent of Managers beat the market before they charge their Fees?
Given that it is not possible to invest in their funds without paying their fees, I'm not sure why that matters. Aren't our returns that we put in our pockets always after costs and fees?
There is nothing to take away from theory? Very valid Q. Maybe OP feels like they could beat the market and wants to know how the pros do without a fed handicap.

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Re: What percent of Managers beat the market BEFORE fees?

Post by buylowbuyhigh » Sun Dec 02, 2018 2:17 pm

kolea wrote:
Sun Dec 02, 2018 1:10 pm
siamond wrote:
Sun Dec 02, 2018 11:54 am
deltaneutral83 wrote:
Sun Dec 02, 2018 11:52 am
Example, there are ten managers in the large cap space, large cap returns returns 10% for a given amount of time. Eight managers return 9%, one manger returns 13% and one more returns 15%. 80% or 8 out of 10 underperform.
Yeah, ok, sure, an average isn't a median, but the law of large numbers should apply here...
It is not that 50% (roughly) of managers will do better and 50% will do worse, it is that 50% of dollars invested will do better and 50% will do worse. The two are not the same unless all funds are of about the same size.
And I don't see why 50% of dollars invested can't underperform the average. Say three companies begin with the same market cap, then one returns 300% and two stay put. Average return 100% but 2/3 of dollars get 0%.

It's natural that the median always loses to the mean when there is a lower bound of -100% but no upper bound. Thus it's a bad bet to trust a single random active manager even if it was free. Paradoxically it costs a fee to use one active fund, but the superior average return of all the active investors is available for "free" using index funds.

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Re: What percent of Managers beat the market BEFORE fees?

Post by oldcomputerguy » Sun Dec 02, 2018 5:02 pm

MotoTrojan wrote:
Sun Dec 02, 2018 1:57 pm
oldcomputerguy wrote:
Sun Dec 02, 2018 11:20 am
andysnp wrote:
Sun Dec 02, 2018 10:58 am
What percent of Managers beat the market before they charge their Fees?
Given that it is not possible to invest in their funds without paying their fees, I'm not sure why that matters. Aren't our returns that we put in our pockets always after costs and fees?
There is nothing to take away from theory? Very valid Q. Maybe OP feels like they could beat the market and wants to know how the pros do without a fed handicap.
Um, how are fees a "fed" handicap?
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Re: What percent of Managers beat the market BEFORE fees?

Post by WanderingDoc » Sun Dec 02, 2018 5:07 pm

vineviz wrote:
Sun Dec 02, 2018 11:17 am
andysnp wrote:
Sun Dec 02, 2018 10:58 am
What percent of Managers beat the market before they charge their Fees?
According to S&P research, about 20% of U.S. domestic equity funds beat the market before fees. It drops to 12% after fees.

https://us.spindices.com/documents/rese ... debate.pdf
Much higher than I thought. May have to reconsider.

When I choose a plumber, or a prom date, its not (very) hard to weed out the bad ones. Logically, the same logic would apply to fund managers.
I'm not looking to get rich quick (stocks), I'm not looking to get rich slow (indexing), I'm looking to get rich, for sure (real estate) | Don't wait to buy real estate. Buy real estate.. and wait.

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Re: What percent of Managers beat the market BEFORE fees?

Post by WanderingDoc » Sun Dec 02, 2018 5:16 pm

nisiprius wrote:
Sun Dec 02, 2018 12:15 pm
Most data, thanks I think to regulations, is after the expense ratio. (It doesn't include sales loads for load funds, or transaction costs).

It is my personal belief, just an impression, that many managers probably do have the skill to generate something like 0.5%/year in alpha through clever selection, but a) it's so small that it's hard to be sure, lost in the noise, depends on endpoints; b) I don't have the skill to identify those managers.

I did a small amount of personal exploration of performance before and after expenses, with one company's funds, in this thread: AQR fund family's performance relative to its benchmarks. I used AQR's own chosen benchmarks even though I believe a number of them to have used a completely bogus far-too-easy benchmark, Treasury bills. You can see charts in the thread. What I found was that
  • After expenses, 27% of the benchmarks were met by their funds, 73% were not met, and on the average, funds were -1.05% below their benchmarks.
  • Before expenses, 44% of the benchmarks were met by their funds, 56% were not met, and on the averages, funds were -0.03% below their benchmark.
In this case, then, the fund managers didn't do any worse than their benchmarks before expenses, but failed to add anything, either. You'd have been just as well off investing in index funds tracking the benchmarks as you would have been in AQR funds. After expenses, of course, you were worse off in the AQR funds.

The obvious next question is "can I develop the same skill myself, create 0.50% of increased returns for myself without taking any more risks, and pocket the alpha for myself?" my answers are: 1) I doubt it, 2) I definitely doubt that you can do it without putting in the equivalent of a forty-hour work week and investing in gotta-pay-for-them databases and information sources. Jim Cramer makes the IMHO-absurd claims that you can diversify adequately with just five stocks, and research them adequately spending in just an hour a week per stock. Even if it were true, it would mean you would be incurring expenses equal to 12.5% of your salary; if your portfolio were ten years' salary, that would mean a "personal expense ratio" of 1.25%.
Well put. Let me add to this statement "...without taking more risks" this is not quantifiable. Moreover, one person's very risky investment is another persons educated/clear-headed/intelligent one. Let me give you a few examples:

- Two people decide to invest in self storage facilities. One person literally knows nothing about it. The other, had 30 years experience and a track record investing in, managing, respositioning, etc. and has a profitable track record. He is also intimately familiar with 2-3 specific markets. They both invest in a few self storage lots. Are they taking the same risk? Nope.
- Someone got into a bad car wreck and is bleeding out of a ruptured spleen. One person is a trauma surgeon with 20 years of experience, the other is a medical student. Who is taking on more risk / is one person riskier for the trauma victim than the other?

The biggest risk is a lack of education.
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Re: What percent of Managers beat the market BEFORE fees?

Post by JoMoney » Sun Dec 02, 2018 5:19 pm

siamond wrote:
Sun Dec 02, 2018 11:44 am
...
HUH? This doesn't seem to make much sense. The answer should be around 50%. What am I missing? Probably some extra fees that the S&P Global report didn't account for?
Maybe there are a few active participants consistently eating the lunch of many active participants with lesser skills/information.
Pareto distributions are pretty common in all sorts of situations, and certainly don't suggest outcomes are evenly or equally distributed. If you had a contest of coin flippers and played it out long enough, eventually it turns into a Pareto distribution.
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Re: What percent of Managers beat the market BEFORE fees?

Post by jalbert » Sun Dec 02, 2018 5:23 pm

siamond wrote:
Sun Dec 02, 2018 11:54 am
deltaneutral83 wrote:
Sun Dec 02, 2018 11:52 am
Example, there are ten managers in the large cap space, large cap returns returns 10% for a given amount of time. Eight managers return 9%, one manger returns 13% and one more returns 15%. 80% or 8 out of 10 underperform.
Yeah, ok, sure, an average isn't a median, but the law of large numbers should apply here...
And how large the sample needs to be for that will depend on the variance of active manager returns, which may be high.
Risk is not a guarantor of return.

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Re: What percent of Managers beat the market BEFORE fees?

Post by jalbert » Sun Dec 02, 2018 5:42 pm

When I choose a plumber, or a prom date, its not (very) hard to weed out the bad ones. Logically, the same logic would apply to fund managers.
That has not held up empirically. The track record for choosing active managers a priori who will outperform has been poor even among financial pros with far more education than the average individual investor.

Moreover, education cannot mitigate all investment risks. As just one example, if you hold only a single stock, you are taking substantial security-specific risk no matter how much education and analysis is brought to bear in the selection of that stock.

And education is effective at mitigating risk of deterministic outcomes but more limited in its ability to mitigate risk of stochastic outcomes. There always will be unforeseeable future events that cannot be accounted for when selecting securities. How many people in 2014 predicted we would have steel and aluminum tariffs today?
Last edited by jalbert on Mon Dec 03, 2018 4:21 pm, edited 1 time in total.
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Re: What percent of Managers beat the market BEFORE fees?

Post by JoMoney » Sun Dec 02, 2018 5:50 pm

^ At the start of 2018 Warren Buffett won his 10 year bet, his opponent insisted he could pick the winning funds from the losers.
http://longbets.org/362/
...There is a wide gap between the returns of the best hedge funds and the average ones. This differential affords sophisticated institutional investors, among them funds of funds, an opportunity to pick strategies and managers that these investors think will outperform the averages. Funds of funds with the ability to sort the wheat from the chaff will earn returns that amply compensate for the extra layer of fees their clients pay.
Even before the extreme costs, the S&P 500 index fund wound up beating the selected hedge funds.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: What percent of Managers beat the market BEFORE fees?

Post by siamond » Sun Dec 02, 2018 5:53 pm

JoMoney wrote:
Sun Dec 02, 2018 5:19 pm
siamond wrote:
Sun Dec 02, 2018 11:44 am
...
HUH? This doesn't seem to make much sense. The answer should be around 50%. What am I missing? Probably some extra fees that the S&P Global report didn't account for?
Maybe there are a few active participants consistently eating the lunch of many active participants with lesser skills/information.
Pareto distributions are pretty common in all sorts of situations, and certainly don't suggest outcomes are evenly or equally distributed. If you had a contest of coin flippers and played it out long enough, eventually it turns into a Pareto distribution.
If a non-negligible number of fund managers (read more than a few very rare guys like Warren Buffet and Peter Lynch) were consistently winning, we would know that. History proved otherwise. That is NOT a Pareto distribution, it's just a bunch of dart throwing monkeys.

No, none of the explanations provided so far explain the 50% vs. 80% disconnect, I mean, those are LARGE numbers, not minor statistical distortions. It is clear to me that the S&P methodology is either flawed or includes very significant costs in the 'no fee' model.

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Re: What percent of Managers beat the market BEFORE fees?

Post by jalbert » Sun Dec 02, 2018 5:55 pm

Given that it is not possible to invest in their funds without paying their fees, I'm not sure why that matters. Aren't our returns that we put in our pockets always after costs and fees?
If, say 80% of active managers fail to beat the market net of fees, this aggregates the data for active managers who consume 1% a year in fees with those who consume 0.17% in fees. It would be interesting to see the data aggregated by membership in relatively narrow bands of fee levels. For instances, what percentage of active managers with fees not to exceed 20 bp/yr underperform?

The data that is gross of fees sort of provides a lower bound on the percentage of active managers who underperform at any given fee level. I said sort of because it is still theoretically possible (even plausible?) that managers with low fees are more likely than high fee managers to overperform gross of fees.
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Re: What percent of Managers beat the market BEFORE fees?

Post by MotoTrojan » Sun Dec 02, 2018 5:58 pm

oldcomputerguy wrote:
Sun Dec 02, 2018 5:02 pm
MotoTrojan wrote:
Sun Dec 02, 2018 1:57 pm
oldcomputerguy wrote:
Sun Dec 02, 2018 11:20 am
andysnp wrote:
Sun Dec 02, 2018 10:58 am
What percent of Managers beat the market before they charge their Fees?
Given that it is not possible to invest in their funds without paying their fees, I'm not sure why that matters. Aren't our returns that we put in our pockets always after costs and fees?
There is nothing to take away from theory? Very valid Q. Maybe OP feels like they could beat the market and wants to know how the pros do without a fed handicap.
Um, how are fees a "fed" handicap?
Fee* thanks for seeking clarification. I stand by the rest.

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Re: What percent of Managers beat the market BEFORE fees?

Post by JoMoney » Sun Dec 02, 2018 6:04 pm

siamond wrote:
Sun Dec 02, 2018 5:53 pm
JoMoney wrote:
Sun Dec 02, 2018 5:19 pm
siamond wrote:
Sun Dec 02, 2018 11:44 am
...
HUH? This doesn't seem to make much sense. The answer should be around 50%. What am I missing? Probably some extra fees that the S&P Global report didn't account for?
Maybe there are a few active participants consistently eating the lunch of many active participants with lesser skills/information.
Pareto distributions are pretty common in all sorts of situations, and certainly don't suggest outcomes are evenly or equally distributed. If you had a contest of coin flippers and played it out long enough, eventually it turns into a Pareto distribution.
If a non-negligible number of fund managers (read more than a few very rare guys like Warren Buffet and Peter Lynch) were consistently winning, we would know that. History proved otherwise. That is NOT a Pareto distribution, it's just a bunch of dart throwing monkeys.

No, none of the explanations provided so far explain the 50% vs. 80% disconnect, I mean, those are LARGE numbers, not minor statistical distortions. It is clear to me that the S&P methodology is either flawed or includes very significant costs in the 'no fee' model.
Over a single one year period, the returns are closer to 50%, but the losers wind up not being able to continue. Over multiple year periods more losers wind up out of the the game and have no hope of recovery, or returning to a positive side of the distribution, which skews towards the Pareto distribution as more and more of the losers are out of the game completely.
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Re: What percent of Managers beat the market BEFORE fees?

Post by WanderingDoc » Sun Dec 02, 2018 6:05 pm

jalbert wrote:
Sun Dec 02, 2018 5:42 pm
When I choose a plumber, or a prom date, its not (very) hard to weed out the bad ones. Logically, the same logic would apply to fund managers.
That has not held up empirically. The track record for choosing active managers a priori who will outperform has been poor even among financial pros with far more education than the average individual investor.

Moreover, education cannot mitigate all investment risks. As just one example, if you hold only a single stock, you are taking substantial security-specific risk no matter how much education and analysis is brought to bear in the selection of that stock.

And education is effective at mitigating risk of deterministic outcomes but more limited in its ability to mitigate risk of stochastic outcomes. There always will be unforeseen future events that cannot be accounted for when selecting securities. How many people in 2014 predicted we would have steel and aluminum tariffs today?
That part about stocastic vs. deterministic effects of radiation - my eyes glaze over in radiation physics class. Still have to look up the meanings despite hearing it 5 or 10 times :P
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Re: What percent of Managers beat the market BEFORE fees?

Post by AlphaLess » Sun Dec 02, 2018 6:09 pm

siamond wrote:
Sun Dec 02, 2018 11:54 am
deltaneutral83 wrote:
Sun Dec 02, 2018 11:52 am
Example, there are ten managers in the large cap space, large cap returns returns 10% for a given amount of time. Eight managers return 9%, one manger returns 13% and one more returns 15%. 80% or 8 out of 10 underperform.
Yeah, ok, sure, an average isn't a median, but the law of large numbers should apply here...
Not really.

If SP.500 turnover is 40% a year, but an active manager trades, say, 1-2% a day, then you have 250-500% turnover.

Trading costs fees (small, but still).

So you could have 98% of the active managers underperforming the index.

That's ball-park where hedge funds are.
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Re: What percent of Managers beat the market BEFORE fees?

Post by siamond » Sun Dec 02, 2018 6:23 pm

JoMoney wrote:
Sun Dec 02, 2018 6:04 pm
Over a single one year period, the returns are closer to 50%, but the losers wind up not being able to continue. Over multiple year periods more losers wind up out of the the game and have no hope of recovery, or returning to a positive side of the distribution, which skews towards the Pareto distribution as more and more of the losers are out of the game completely.
The S&P report is supposed to account for survivorship bias (Nisi thought they didn't do it well, but at least they tried, as explained in the appendix).

It's funny to see numerous posters on this thread quite bent on asserting that a (non-negligible) minority of fund managers can make a real difference. I have yet to hear a single hard fact going in this direction. Admittedly, most people on this forum (incl. myself) may have a bit of a selective listening attitude in this respect... :wink:

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Re: What percent of Managers beat the market BEFORE fees?

Post by JoMoney » Sun Dec 02, 2018 6:31 pm

siamond wrote:
Sun Dec 02, 2018 6:23 pm
JoMoney wrote:
Sun Dec 02, 2018 6:04 pm
Over a single one year period, the returns are closer to 50%, but the losers wind up not being able to continue. Over multiple year periods more losers wind up out of the the game and have no hope of recovery, or returning to a positive side of the distribution, which skews towards the Pareto distribution as more and more of the losers are out of the game completely.
The S&P report is supposed to account for survivorship bias (Nisi thought they didn't do it well, but at least they tried, as explained in the appendix).

It's funny to see numerous posters on this thread quite bent on asserting that a (non-negligible) minority of fund managers can make a real difference. I have yet to hear a single hard fact going in this direction. Admittedly, most people on this forum (incl. myself) may have a bit of a selective listening attitude in this respect... :wink:
The report states that after one year there was 96.76% survivorship (All Domestic Funds)
At three years it goes to 83.27% survivorship
That's not a "negligble" minority, and over longer periods the survivorship goes way down. It's not the winning the funds that are being shutdown.
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Re: What percent of Managers beat the market BEFORE fees?

Post by siamond » Sun Dec 02, 2018 6:45 pm

JoMoney wrote:
Sun Dec 02, 2018 6:31 pm
The report states that after one year there was 96.76% survivorship (All Domestic Funds)
At three years it goes to 83.27% survivorship
That's not a "negligble" minority, and over longer periods the survivorship goes way down. It's not the winning the funds that are being shutdown.
But again, the stats in the report ARE supposed to account for such survivorship bias. And the negligible minority I was referring to was not the surviving funds, but the ones making true & sustained profits before fees and hidden costs, which is quite different.

I'm sorry, we seem to be speaking past each other? Am I missing something obvious?

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Re: What percent of Managers beat the market BEFORE fees?

Post by JoMoney » Sun Dec 02, 2018 7:07 pm

siamond wrote:
Sun Dec 02, 2018 6:45 pm
JoMoney wrote:
Sun Dec 02, 2018 6:31 pm
The report states that after one year there was 96.76% survivorship (All Domestic Funds)
At three years it goes to 83.27% survivorship
That's not a "negligble" minority, and over longer periods the survivorship goes way down. It's not the winning the funds that are being shutdown.
But again, the stats in the report ARE supposed to account for such survivorship bias. And the negligible minority I was referring to was not the surviving funds, but the ones making true & sustained profits before fees and hidden costs, which is quite different.

I'm sorry, we seem to be speaking past each other? Am I missing something obvious?
Yes, it does seem that we don't understand what the other is saying.

It is the "accounting for survivorship bias" that skews the results to show indexing beating more and more active funds over longer periods of time.
If you only looked at a single year, it is close to 50%, but over time more and more funds stop competing (are shutdown because of the failure to perform) and have no hope of recovery.
If you didn't account for all the funds that were shutdown over a 10 or 15 year period, the relative performance of the surviving active funds would probably be closer to 50% (or maybe better).
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Re: What percent of Managers beat the market BEFORE fees?

Post by nisiprius » Sun Dec 02, 2018 7:29 pm

WanderingDoc wrote:
Sun Dec 02, 2018 5:07 pm
vineviz wrote:
Sun Dec 02, 2018 11:17 am
andysnp wrote:
Sun Dec 02, 2018 10:58 am
What percent of Managers beat the market before they charge their Fees?
According to S&P research, about 20% of U.S. domestic equity funds beat the market before fees. It drops to 12% after fees.

https://us.spindices.com/documents/rese ... debate.pdf
Much higher than I thought. May have to reconsider.

When I choose a plumber, or a prom date, its not (very) hard to weed out the bad ones. Logically, the same logic would apply to fund managers.
And to stocks. If we can't pick the good ones, surely we can at least pick the bad ones, right? And then short them. And that's why 130/30 funds reached $2 trillion in assets in 2010 and have pretty much superseded long-only funds. <---Irony.
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Re: What percent of Managers beat the market BEFORE fees?

Post by siamond » Sun Dec 02, 2018 7:48 pm

JoMoney wrote:
Sun Dec 02, 2018 7:07 pm
Yes, it does seem that we don't understand what the other is saying.

It is the "accounting for survivorship bias" that skews the results to show indexing beating more and more active funds over longer periods of time.
If you only looked at a single year, it is close to 50%, but over time more and more funds stop competing (are shutdown because of the failure to perform) and have no hope of recovery.
If you didn't account for all the funds that were shutdown over a 10 or 15 year period, the relative performance of the surviving active funds would probably be closer to 50% (or maybe better).
Aaaahhh... I think I get it now (thank you for your patience!). I never thought much about the mechanics of survivorship bias avoidance. This seems a little screwy... :?

Let me illustrate with an example and you tell me if I got it right. Say we have a large pool of funds (and managers) to start with. Five years later, the S&P report says that roughly 60% survived (that fact in itself is a bit mind-boggling!). The 40% which went under (for any reason) are counted as "underperformed". In the 60% that survived, it stands to reason that half of them underperformed (and survived thanks to fees) like should be the case in any reasonably large sample. Therefore only 30% are counted as "overperformed". And 70% are counted as "underperformed". Which is quite a striking number. Then you add some trading costs or something like that and you're at 80% in no time. :shock:

PS. let me quote the report's appendix B which seems to confirm this interesting hypothesis:
Percentage of Managers Outperformed by the Index
To correct for survivorship bias, we use the opportunity set available at the beginning of the period as
the denominator. We determine the count of products that have survived and beat the index. We then
report the index outperformance percentage.

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Re: What percent of Managers beat the market BEFORE fees?

Post by BeBH65 » Sun Dec 02, 2018 7:59 pm

Could this also be the other way around: every year a number of funds underperform so badly that they don't survive?
What are the chances that a good performing fund is liquidated?
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Re: What percent of Managers beat the market BEFORE fees?

Post by grabiner » Sun Dec 02, 2018 8:07 pm

siamond wrote:
Sun Dec 02, 2018 6:23 pm
It's funny to see numerous posters on this thread quite bent on asserting that a (non-negligible) minority of fund managers can make a real difference. I have yet to hear a single hard fact going in this direction. Admittedly, most people on this forum (incl. myself) may have a bit of a selective listening attitude in this respect... :wink:
I don't think that is the point people are making. If there were no ability for superior stock-picking, half of all managers would beat the market before fees. If there were an ability, more than half of those with above-average ability would beat the market, but half would still beat the market before fees, since the market must match the average manager. (There are some discussions about skewness; technically, the market must match the mean return, not necessarily the median return.)
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Re: What percent of Managers beat the market BEFORE fees?

Post by WanderingDoc » Sun Dec 02, 2018 8:42 pm

grabiner wrote:
Sun Dec 02, 2018 8:07 pm
siamond wrote:
Sun Dec 02, 2018 6:23 pm
It's funny to see numerous posters on this thread quite bent on asserting that a (non-negligible) minority of fund managers can make a real difference. I have yet to hear a single hard fact going in this direction. Admittedly, most people on this forum (incl. myself) may have a bit of a selective listening attitude in this respect... :wink:
I don't think that is the point people are making. If there were no ability for superior stock-picking, half of all managers would beat the market before fees. If there were an ability, more than half of those with above-average ability would beat the market, but half would still beat the market before fees, since the market must match the average manager. (There are some discussions about skewness; technically, the market must match the mean return, not necessarily the median return.)
Of course there are plenty of people who beat the 'market', every day and long term. Clearly, there are more and less intelligent people. We all know them. I never understood the dogmatic, socialistic thinking that we can all just hope to be average. No! Just like there are above average bicyclists, surgeons, painters, etc. there are above and below average equities investors. You just need to get around these people to get an idea of who is. Myself, I don't invest in individual stocks because its not my highest and best use. However, I can tell who is a good accountant and a bad accountant. Its not a stretch that this applies to investors as well.
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Re: What percent of Managers beat the market BEFORE fees?

Post by JoMoney » Sun Dec 02, 2018 8:53 pm

siamond wrote:
Sun Dec 02, 2018 7:48 pm
JoMoney wrote:
Sun Dec 02, 2018 7:07 pm
Yes, it does seem that we don't understand what the other is saying.

It is the "accounting for survivorship bias" that skews the results to show indexing beating more and more active funds over longer periods of time.
If you only looked at a single year, it is close to 50%, but over time more and more funds stop competing (are shutdown because of the failure to perform) and have no hope of recovery.
If you didn't account for all the funds that were shutdown over a 10 or 15 year period, the relative performance of the surviving active funds would probably be closer to 50% (or maybe better).
Aaaahhh... I think I get it now (thank you for your patience!). I never thought much about the mechanics of survivorship bias avoidance. This seems a little screwy... :?

Let me illustrate with an example and you tell me if I got it right. Say we have a large pool of funds (and managers) to start with. Five years later, the S&P report says that roughly 60% survived (that fact in itself is a bit mind-boggling!). The 40% which went under (for any reason) are counted as "underperformed". In the 60% that survived, it stands to reason that half of them underperformed (and survived thanks to fees) like should be the case in any reasonably large sample. Therefore only 30% are counted as "overperformed". And 70% are counted as "underperformed". Which is quite a striking number. Then you add some trading costs or something like that and you're at 80% in no time. :shock:

PS. let me quote the report's appendix B which seems to confirm this interesting hypothesis:
Percentage of Managers Outperformed by the Index
To correct for survivorship bias, we use the opportunity set available at the beginning of the period as
the denominator. We determine the count of products that have survived and beat the index. We then
report the index outperformance percentage.
Yes, that sounds about right. I'm not sure why you think that seems screwy though, a person selecting from a group of funds has to select from those available at the start of the period. If the fund stops operating it has no hope of moving to the right side of the distribution, it's out of the game.
If someone managed to pick a fund that lasted the entire period, it probably has something close to 50/50 chance of being on either side of the distribution, but you don't know in advance which funds will last the entire period, you have to select from what's available.
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Re: What percent of Managers beat the market BEFORE fees?

Post by moneywise3 » Sun Dec 02, 2018 11:34 pm

BTW, whoever beats the market is random. It's not skill.

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Re: What percent of Managers beat the market BEFORE fees?

Post by JoMoney » Sun Dec 02, 2018 11:47 pm

moneywise3 wrote:
Sun Dec 02, 2018 11:34 pm
BTW, whoever beats the market is random. It's not skill.
I would wager that it's both.
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Re: What percent of Managers beat the market BEFORE fees?

Post by buylowbuyhigh » Mon Dec 03, 2018 11:58 am

grabiner wrote:
Sun Dec 02, 2018 8:07 pm
siamond wrote:
Sun Dec 02, 2018 6:23 pm
It's funny to see numerous posters on this thread quite bent on asserting that a (non-negligible) minority of fund managers can make a real difference. I have yet to hear a single hard fact going in this direction. Admittedly, most people on this forum (incl. myself) may have a bit of a selective listening attitude in this respect... :wink:
I don't think that is the point people are making. If there were no ability for superior stock-picking, half of all managers would beat the market before fees. If there were an ability, more than half of those with above-average ability would beat the market, but half would still beat the market before fees, since the market must match the average manager. (There are some discussions about skewness; technically, the market must match the mean return, not necessarily the median return.)
In response to both: I'm sorry if I don't understand the problem here, but I think it's totally reasonable that 80% underperform due to skewness. It wouldn't even require those mysterious supermanagers in the overperforming 20% to make the difference, since there is no statement about the magnitudes of returns, only frequencies. For example, if the market return (mean) is 7% CAGR during five years, it could come from 80% of assets returning 6.75% and 20% returning 8%. A 1% of overperformance is a lot in the long tem, but it would be eaten by the fund fee and those funds still wouldn't overperform or be hyped.

The source of this thread gives some backing evidence:

viewtopic.php?f=10&t=248243

Individual stocks are very skewed, and if a typical fund has a relatively small number of holdings, the skewness could in theory pass on to funds to some extent.

Of course the reason can as well be hidden fees not accounted for, unfair survivorship adjustment or that the mean return of the studied funds is less than the market return (foreigners also invest in the US :wink: ). However from a mathematical point of view the statement that 50% of investors or assets get the market return or better is incorrect. I for one like the idea that an index fund (mean return) could beat a typical active fund (median) already before fees (or other hidden costs).

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Re: What percent of Managers beat the market BEFORE fees?

Post by vineviz » Mon Dec 03, 2018 12:08 pm

WanderingDoc wrote:
Sun Dec 02, 2018 8:42 pm
However, I can tell who is a good accountant and a bad accountant. Its not a stretch that this applies to investors as well.
Based on all the available evidence, it IS in fact a huge stretch.

Most professional money managers are incredibly smart and talented. That's not the problem. The problem is that markets produce such an incredibly high ratio of noise to signal that picking out the money managers who are EXCEPTIONALLY skilled is nearly impossible.

The best money managers might beat the market 55-60% of the time. They're either dead or retired before we have enough time to separate the lucky ones from the skilled ones.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: What percent of Managers beat the market BEFORE fees?

Post by siamond » Mon Dec 03, 2018 3:24 pm

vineviz wrote:
Mon Dec 03, 2018 12:08 pm
WanderingDoc wrote:
Sun Dec 02, 2018 8:42 pm
However, I can tell who is a good accountant and a bad accountant. Its not a stretch that this applies to investors as well.
Based on all the available evidence, it IS in fact a huge stretch.
Yes, exactly. This is probably the only industry I know where smarts & talent & hard work do NOT seem to make a difference. And it is terribly counter-intuitive and hard to grasp. But it's been very clearly demonstrated by academics studying decades of mutual fund data. Hence the (admittedly not so nice, but apparently quite true) analogy with dart-throwing monkeys. One can get lucky for a little while, there are always lucky folks in a large group of people. But this is very unlikely to last, and you can't predict in advance who will be lucky and for how long. And this is even *before* the cost factors come in action...

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Re: What percent of Managers beat the market BEFORE fees?

Post by cheese_breath » Mon Dec 03, 2018 4:34 pm

siamond wrote:
Mon Dec 03, 2018 3:24 pm
vineviz wrote:
Mon Dec 03, 2018 12:08 pm
WanderingDoc wrote:
Sun Dec 02, 2018 8:42 pm
However, I can tell who is a good accountant and a bad accountant. Its not a stretch that this applies to investors as well.
Based on all the available evidence, it IS in fact a huge stretch.
Yes, exactly. This is probably the only industry I know where smarts & talent & hard work do NOT seem to make a difference. And it is terribly counter-intuitive and hard to grasp. But it's been very clearly demonstrated by academics studying decades of mutual fund data. Hence the (admittedly not so nice, but apparently quite true) analogy with dart-throwing monkeys. One can get lucky for a little while, there are always lucky folks in a large group of people. But this is very unlikely to last, and you can't predict in advance who will be lucky and for how long. And this is even *before* the cost factors come in action...
Somebody once told me the stock market runs on emotion, and I think to a degree that's true. And it's really hard to predict emotions.
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Re: What percent of Managers beat the market BEFORE fees?

Post by vineviz » Mon Dec 03, 2018 5:02 pm

siamond wrote:
Mon Dec 03, 2018 3:24 pm
vineviz wrote:
Mon Dec 03, 2018 12:08 pm
WanderingDoc wrote:
Sun Dec 02, 2018 8:42 pm
However, I can tell who is a good accountant and a bad accountant. Its not a stretch that this applies to investors as well.
Based on all the available evidence, it IS in fact a huge stretch.
Yes, exactly. This is probably the only industry I know where smarts & talent & hard work do NOT seem to make a difference.
It may be apocryphal, but I've heard this story more than once: a young investment manager asked Julian Robertson, the famous hedge fund investor, if he had any advice for someone just starting out. Robertson apparently said "Yes. Be very lucky your first year."
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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