GoldenGoose wrote: ↑Fri Oct 30, 2020 7:36 am
afan wrote: ↑Thu Oct 29, 2020 6:07 am
I may want a unicorn. That does not mean such creatures exist.
If you deviate from the market by holding active funds, you create the possibility of having different returns. These differences will reflect a combination of luck, good or bad, and expenses. The luck will be random and you may benefit or lose. The expenses will always be a negative factor. These effects compound. Day after day and year after year you are hoping to get lucky enough to overcome your expenses. The odds are that your active portfolio underperform the broad market index funds will increase as time goes by.
"The arithmetic of active management"
"Luck vs skill in the cross section of mutual fund returns"
And the cost of active management paper I cited above are good places to start if you want to read the objective data on this question.
No question here reg active vs passive and how fees and churning more than likely sink the return of active as compared to passive. And the higher risk you take the more luck involves. No doubt. Just want to know if there is an investing strategy that has a more than 60% or higher chance of beating that assuming return of passive index investing.
For a while, people thought they could beat the market on a nominal basis, before accounting for risk, by tilting toward small cap value. That has not worked for a long time now. No one knows whether it was just a string of luck that ran out, a compensation for risk but the risk has declined, or whether it was really a reliable anomaly.
It never worked when adjusting for risk.
Since the deviations from the market return are due to chance, you are asking whether there is a way to produce a 60% chance of making a coin come up heads. "Not with a fair coin."
If you can get some legal inside information, convince someone to pay you more for stocks than they are selling in the market or otherwise move the odds in your favor, then maybe you can get that 60% chance.
If you can get people to pay you 1% of assets to try to beat the market, then you make money on the fees, even if your investments underperform.
Absent those advantages, then no. There is no reliable way to beat a fair coin.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either |
We assume that markets are efficient, that prices are right |