Why don't good ideas beat the market?

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Forester
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Why don't good ideas beat the market?

Post by Forester »

Why don't good ideas beat the market?

Cost of implementation? Relying on data from the 00s, 90s, 80s, which may not be relevant any longer?

This is not scientific, but it's every domestic US equity fund from AQR, Cambria, Alpha Architect & O'Shaughnessy Asset Management over the last three years. All these people have produced excellent research and in every case the funds were grounded in empirical evidence.

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Forester
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Re: Why don't good ideas beat the market?

Post by Forester »

"Value might make a comeback" - possibly, but the market as a whole has a 32% head start.

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randomguy
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Re: Why don't good ideas beat the market?

Post by randomguy »

And if you look back historically how often are there 3 year periods like this? Most of these tilts have trends where they underperform for 5-10 years and then hit a period where they drastically outperform.

For example 1997-2002
US Market 4%
Small Value 8%

I.e. the outperformance that was predicated. But if you looked that the numbers in 2000 they were
1997-1999
US Market 26%
Small Value 11%

And you would be posting how the strategies suck.

Or of course the strategies could just be flawed or too expensive (i.e. they make an extra 1% but you are paying 2% to get it for a net loss). You would have to look at each strategy to make that choice.
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SagaciousTraveler
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Re: Why don't good ideas beat the market?

Post by SagaciousTraveler »

Good ideas can certainly beat the market. But can they do it consistently. More importantly, the times they don't beat the market how much did they lose by and does it start taking away from previous years 'wins'.
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Seasonal
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Re: Why don't good ideas beat the market?

Post by Seasonal »

Forester wrote: Fri Jan 25, 2019 12:28 pm Why don't good ideas beat the market?
Because the market is already aware of the good ideas and has already taken them into account. Good ideas only really work when they are not known by others.

Many good ideas involve more risk. Many good ideas are only good ideas when back-tested, not going forward.
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TheTimeLord
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Re: Why don't good ideas beat the market?

Post by TheTimeLord »

Forester wrote: Fri Jan 25, 2019 12:28 pm Why don't good ideas beat the market?
They can and do. Problem to me is once a fund is popular they may not have enough good ideas for all the money they get. I really think a large part of the problem with actively managed funds is money flows caused by the behavioral mistakes of their investors.
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greg24
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Re: Why don't good ideas beat the market?

Post by greg24 »

Costs matter.
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Re: Why don't good ideas beat the market?

Post by knpstr »

Diversification is a drag on potential outperformance. One should focus on a handful of investments.
Diversification is critical to average performance. One should focus on minimizing costs.

If one wants to beat the market consistently, they must be very smart and have conviction so they won't diversify and lower their returns.
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Re: Why don't good ideas beat the market?

Post by 220volt »

To beat the market you have to know something the majority don't. Consistently.
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Re: Why don't good ideas beat the market?

Post by bgf »

Just read this about an hour ago, and its so on point I had to quote it -

"So if markets are not perfectly efficient but not grossly inefficient either—though occasionally pretty darn wacky—what should investors do? We believe the vast majority would be better off acting like the market was perfectly efficient than acting like it was easily beatable. Active management is hard. That’s not to say we think it’s impossible. Take, for instance, our favorite example, briefly mentioned earlier, of people who seem to be able to consistently beat the market: Renaissance Technologies. It’s really hard to reconcile their results long-term with market efficiency (and any reasonable equilibrium model). But here’s how it’s still pretty efficient to us: We’re not allowed to invest with them (don’t gloat; you’re not either). They invest only their own money. In fact, in our years of managing money, it seems like whenever we have found instances of individuals or firms that seem to have something so special (you never really know for sure, of course), the more certain we are that they are on to something, the more likely it is that either they are not taking money or they take out so much in either compensation or fees that investors are left with what seems like a pretty normal expected rate of return. (Any abnormally wonderful rate of return for risk can be rendered normal or worse with a sufficiently high fee.)"

- 'The Great Divide' by Asness and Liew

https://www.aqr.com/Insights/Research/J ... eat-Divide
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MathWizard
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Re: Why don't good ideas beat the market?

Post by MathWizard »

220volt wrote: Fri Jan 25, 2019 1:19 pm To beat the market you have to know something the majority don't. Consistently.
Also, you have to do so without insider knowledge.

Knowledge (other than inside knowledge which is illegal) is more widespread. Benjamin Graham himself said this back in 1976.

"I am no longer an advocate of elaborate techniques of Security Analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent, I'm on the side of the "efficient market" school of thought now generally accepted by the professors."
ref: Financial Analysts Journal Vol. 32, No. 5 (Sep. - Oct., 1976), pp. 20-23
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Re: Why don't good ideas beat the market?

Post by k66 »

I can think of at least one good idea that consistently beats (average) market performance net fees... (which is the only performance metric which matters).

Thanks again Jack.
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Forester
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Re: Why don't good ideas beat the market?

Post by Forester »

Ben Graham would have been a quant in the 80s & 90s and an indexer by the 00s (?)

Will it ever be possible again to get an easy 15% a year by buying one slice of a market (P/E, P/B etc)? Seems unlikely.
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Re: Why don't good ideas beat the market?

Post by KJVanguard »

greg24 wrote: Fri Jan 25, 2019 1:13 pmCosts matter.
You are sounding like John Bogle, and I agree fully.
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Re: Why don't good ideas beat the market?

Post by Independent George »

Good ideas do beat the market. All the time. It's just that the good ideas are in companies that actually make and do stuff (like FAANG), and not the expert analysts who think they can tell the future.

The stock market is not the economy, and the analysts are not the stock market.
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Re: Why don't good ideas beat the market?

Post by bluquark »

TheTimeLord wrote: Fri Jan 25, 2019 1:08 pm
Forester wrote: Fri Jan 25, 2019 12:28 pm Why don't good ideas beat the market?
They can and do. Problem to me is once a fund is popular they may not have enough good ideas for all the money they get. I really think a large part of the problem with actively managed funds is money flows caused by the behavioral mistakes of their investors.
The fund managers have the option of closing the fund to new investors out of fiduciary duty to their existing investors. If you are an early investor in one of these funds that is supposedly dragged down by too much money, you should still be blaming the fund manager.
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Re: Why don't good ideas beat the market?

Post by galeno »

If you are willing to take MORE risk than "the market" you MAY beat it. Then again you may not.

Portfolio costs of commissions, spreads, and taxes are a BIG factor.

As an individual investor you are playing against professionals who are also trying to beat the market.
KISS & STC.
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Re: Why don't good ideas beat the market?

Post by alex_686 »

Who says that good ideas don't beat the market?

Some issues.

It is hard to keep good ideas secret, thus good ideas quickly become average ideas.

It is hard to figure out what a good idea is. Is Value and Small Cap good ideas? How long have we been arguing over that one? The great thing about investing is that there is a huge amount of data out there. The bad news is that lots of people are data mining it, and I am using data mining in a negative sense.

Secular and structural changes. What was a good idea yesterday may turn out to be a very bad idea tomorrow.
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JoMoney
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Re: Why don't good ideas beat the market?

Post by JoMoney »

Maybe what you're calling "good ideas" are not good ideas. They're just a compelling narrative coupled with data mining.
In Josh Brown's ("The Reformed Broker") book Backstage Wall Street there's an interesting section, Part 3 "The Pitch" Chapter 19 "Story Time"
... The most effective method of selling anything in this world is through storytelling. The holy books of all the world’s major religions employ this very tactic. So do the best commercials, lawyers, and universities. “Our product will change your life . . . ,” “Ladies and gentlemen of the jury . . . ,” “Our students go on to achieve success beyond their wildest dreams . . .”
But try as they might, none of them even come close to matching the storytelling ability of Wall Street.
The selling of financial products and services has evolved into an art form all its own, dating from The Street’s humble beginnings as a hub for professional speculators. When civilian money became a more important part of the daily doings on Wall Street, it became necessary to develop a story component in order to direct that money to where it was needed.
...
Now keep in mind that we’re not talking about trickery per se, but storytelling as a means to coax investment dollars into a given theme or thesis, often with the investors’ best interest in mind. And while the intentions of the storytellers may be good, they certainly do not excuse the carnival-barker nature of it all. In my relatively short time on The Street, I’ve seen hundreds of billions of dollar thrown in all kinds of erratic directions in pursuit of story. The reason it continues to this day is very simple: it works. It moves units, generates commissions, and raises assets. People love stories, and they react to them frequently ...
"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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Davinci
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Re: Why don't good ideas beat the market?

Post by Davinci »

Why don't good ideas beat the market?
Can you please be more specific of what good ideas you are referring to?
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tadamsmar
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Re: Why don't good ideas beat the market?

Post by tadamsmar »

Cambria does not consistently outperform benchmarks:

https://www.ifa.com/articles/cambria_fu ... rformance/
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Re: Why don't good ideas beat the market?

Post by balbrec2 »

Why do investors feel that they need to beat the market to
be successful? Success should be measured by being able to meet your
requirements.
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Re: Why don't good ideas beat the market?

Post by tadamsmar »

This (positive skew of stock returns) explains why a merely good idea can face some hard sailing:

viewtopic.php?t=248243
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Re: Why don't good ideas beat the market?

Post by TheTimeLord »

bluquark wrote: Fri Jan 25, 2019 4:08 pm
TheTimeLord wrote: Fri Jan 25, 2019 1:08 pm
Forester wrote: Fri Jan 25, 2019 12:28 pm Why don't good ideas beat the market?
They can and do. Problem to me is once a fund is popular they may not have enough good ideas for all the money they get. I really think a large part of the problem with actively managed funds is money flows caused by the behavioral mistakes of their investors.
The fund managers have the option of closing the fund to new investors out of fiduciary duty to their existing investors. If you are an early investor in one of these funds that is supposedly dragged down by too much money, you should still be blaming the fund manager.
And what exactly are the fiduciary responsibilities of mutual fund managers?
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Re: Why don't good ideas beat the market?

Post by willthrill81 »

TheTimeLord wrote: Fri Jan 25, 2019 1:08 pm
Forester wrote: Fri Jan 25, 2019 12:28 pm Why don't good ideas beat the market?
They can and do. Problem to me is once a fund is popular they may not have enough good ideas for all the money they get. I really think a large part of the problem with actively managed funds is money flows caused by the behavioral mistakes of their investors.
Definitely.

Another problem is that most of those seeking to beat the market are very short-term focused. David Stein of the Money for the Rest of Us podcast worked as a consultant for college endowments for years, and he says that virtually none of those endowments who used active management would stick with a fund or manager who trailed the market for longer than a couple of years.

Look at someone who is espoused to have found the 'secret sauce': Warren Buffett. Berkshire Hathaway has gone for many years, over a decade IIRC, where they trailed the market before finally outperforming it. How many investors are willing to underperform for a decade in order to potentially outperform in the long-run?
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Re: Why don't good ideas beat the market?

Post by Watty »

Forester wrote: Fri Jan 25, 2019 12:28 pm his is not scientific, but it's every domestic US equity fund from AQR, Cambria, Alpha Architect & O'Shaughnessy Asset Management over the last three years. All these people have produced excellent research and in every case the funds were grounded in empirical evidence.
That are likely a hundred companies like this that are all looking for a "good idea" so any "good idea" quickly gets bid up in price so the companies that buy it later pay too much to beat an index fund that already owns a small piece of all "good ideas".

To make money with a "good idea" you not only have to have the "good idea" but you have to have it before everyone else does to.

To run a mutual fund you will need dozens or hundreds of "good ideas" each year which makes it very difficult to consistently have them before anyone else does.
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Re: Why don't good ideas beat the market?

Post by TheTimeLord »

hdas wrote: Sat Jan 26, 2019 11:30 am
willthrill81 wrote: Sat Jan 26, 2019 11:19 am Another problem is that most of those seeking to beat the market are very short-term focused. David Stein of the Money for the Rest of Us podcast worked as a consultant for college endowments for years, and he says that virtually none of those endowments who used active management would stick with a fund or manager who trailed the market for longer than a couple of years.
This is how it should be. Why would you stay with a loser?. However, it must be done correctly. Look at the track records of quant oriented funds that are now closed to new investors and are now slowly returning money (DE Shaw, 2Sigma, et al). They have a systematic approach that outperforms in most timeframes.

Furthermore, family offices of former quant ppl are quite adept at systematically finding good managers and dumping them too.
A very imprecise characterization, can you provide the measurements and timeframes one would use to make this most telling of determinations about someone managing investments?
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Re: Why don't good ideas beat the market?

Post by BSBHead »

Seasonal wrote: Fri Jan 25, 2019 1:04 pm
Forester wrote: Fri Jan 25, 2019 12:28 pm Why don't good ideas beat the market?
Because the market is already aware of the good ideas and has already taken them into account. Good ideas only really work when they are not known by others.

Many good ideas involve more risk. Many good ideas are only good ideas when back-tested, not going forward.
100% agree with both comments. Good ideas, i.e. low volatility, make sense but quite frankly that's already quite a crowded trade by the time retail investors are looking into it. New ideas always back test well and are designed to do such. It's the only way to justify a strategy with no track record.
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Re: Why don't good ideas beat the market?

Post by fennewaldaj »

hdas wrote: Sat Jan 26, 2019 11:30 am
willthrill81 wrote: Sat Jan 26, 2019 11:19 am Another problem is that most of those seeking to beat the market are very short-term focused. David Stein of the Money for the Rest of Us podcast worked as a consultant for college endowments for years, and he says that virtually none of those endowments who used active management would stick with a fund or manager who trailed the market for longer than a couple of years.
This is how it should be. Why would you stay with a loser?. However, it must be done correctly. Look at the track records of quant oriented funds that are now closed to new investors and are now slowly returning money (DE Shaw, 2Sigma, et al). They have a systematic approach that outperforms in most timeframes.

Furthermore, family offices of former quant ppl are quite adept at systematically finding good managers and dumping them too.
I think Vanguard did a study of long term out performing active strategies and found they basically all inevitably have periods of 3-5 years of underperformance. Granted the pool of active strategies that we have to chose from as small investors is smaller and likely of slightly lower quality.
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Re: Why don't good ideas beat the market?

Post by Nate79 »

A good idea was only a good idea in hindsight. Back testing does not give one the ability to predict the future.
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Re: Why don't good ideas beat the market?

Post by fortyofforty »

To corrupt a phrase:

To beat the market, you have to be the market.
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