retired at 48 wrote:I didn't suggest we can. Obviously we can't compete in Simons' arena.
Assuming Renaissance is actually returning 24% a year, it is only a matter of time until there are equally competent competitors competing for the profits that can be generated by computerized algorithmic trading based on small momentum moves. Why should we not expect that to drive their returns down to something approaching the market return?
Moreover, I'm skeptical that the Renaissance returns are actually being generated without increased risk. Anyone remember LTCM?
retired at 48 wrote:Why do people think comparable, improved strategies can't be developed for the more knowledgeable investors on this forum? Sure, buy and hold will serve many who can and do only devote a few hours a year to investing, often leaving it to others. But those taking an active interest...why not better ways.
I think the reason people (here) think that is because it's what the data shows. The majority of mutual funds are actively managed, and there is return data from well over fifty years of management. Investment managers who rise to level of managing a mutual fund are in general among the best managers in the industry. Yes, there is an issue of mammoth size reducing fund returns, but the vast majority of funds have easily manageable sizes. And these managers, who are generally among the best paid and most skillful managers that exist, have devoted their full time to trying to find ways of beating the market. The vast majority have failed.
That is basically what a big part of the argument against active management consists of. Active fund managers have for well over half a century explored every way under the sun of trying to beat the market, and most have failed.
With that in mind I ask myself: Regardless of how much time I spend managing my investments, how likely do _I_ think it is that _I_ can do a better than those active fund managers, who were by and large just as smart as me and who devoted their full-time jobs to trying to beat the market return and who -- with a few exceptions -- failed? (And how likely do I think it is that the ones who have beaten the market return have succeeded based on skill and not luck?)
The reasonable attitude to take: There is virtually nothing really new under the sun in investing. Everything has been tried. Be very aware of the role that overconfidence and other behavioral traits play in undermining our investment success. Best to just take the market return, which is in comparison to the lesser returns of the vast majority of investors an excellent return, and be done with it.
All of this is not to deny that there are investors out there who can legitimately beat the market. The question to answer is what there is about yourself (or whatever adviser or manager you've identified) that makes them more likely to succeed than the thousands and thousands of active fund managers who have already demonstrably failed.
I personally know at least one guy who I believe has significantly outperformed the market for almost 40 years based on his skill at investing. I have talked with him in detail about his methods; I know exactly what he does and I have as good an idea as he does what he looks for and analyzes in picking his stocks and making buy/sell decisions. Yet I have no confidence that I could invest as successfully as he does. There is something ineffable in what he does, something that can't be communicated.
I expect there is something similar in W. Buffett's investing, too. God knows there are thousands of people out there who have studied Buffett's methods. Is it not strange that there are not more people around with records similar to Buffett's? To me, that just adds another reason to focus on getting the market return using a strategy that diversifies broadly among asset classes. Forget about being the next Buffett, or even the next mini-Buffett. The vast, vast majority of people who have that as a goal are going to end up being disappointed, and will be lucky if in the process they don't harm their financial futures.
On a related note, although some aspects of Buffett's current method of investing with Berkshire is not one that average individual can copy, his core method of identifying undervalued companies is one he used for many years before he became ultra-rich, and in fact is what created his wealth. He has 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://vinvesting.com/docs/bg/buffett_int071205.html
) I think that involves a bit of bragging, but I have no doubt that he woud outperform the market by a large amount. The question remains, why are there not more managers that can do that?
I do think that if someone wants to put legwork in to try and outperform the market then forget about finding something fancy and new; something like the old boring tried and true Graham/Buffett method is the most promising, and his Superinvestors speech points the way: http://en.wikipedia.org/wiki/The_Superi ... Doddsville
Still, I think there's more than analysis that's needed to come close to their results, you need to have _judgment_ as good as theirs, and I don't tthink many of us do.
Just my two cents.