Forget whether I can or can't beat the market, do I need to?

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Sunny Sarkar
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Forget whether I can or can't beat the market, do I need to?

Post by Sunny Sarkar »

The logic behind almost all the discussions and justifications of active management revolves around the ability to beat the market - to which passive indexers point out that history says otherwise. And the argument continues.

But then I look at the historical charts of how much a dollar would have grown had it been "invested in the market" so many years ago, and I tell myself... you know what, that's pretty darn good. If I could just sit on that curve through ups and down for a couple of decades, and do nothing else, I'd be in darn good shape. Who cares if I can or can't beat the market? I don't need to!
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Post by sport »

Sunny,
I believe the proponents of active management have a somewhat different outlook. They ask how can they maximize their investment results for a given amount of risk. It is about maximizing returns, not beating any particular bogey.

Best wishes,
Jeff
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Post by ken250 »

Jeff...you da man! I agree 100%.
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Post by ronr »

Sunny,

I don't know if "you" have to beat the market.

I'm retired. For me the critical part of my financial plan was figuring out how much I would need during retirement. I did this in Microsoft Excel.

Once you know that, you can go on to computing what kind of rate of return you require in order to achieve those goals.

There's an awful lot to take into account when you do that, of course. It is not a trivial task. But you can make assumptions about inflation, longevity, maximum portfolio drawdown, etc., that bring some clarity to the calculation.
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Sunny

Post by SamB »

*****
Last edited by SamB on Thu Dec 15, 2011 11:21 am, edited 1 time in total.
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Post by jar2574 »

Great post Sunny.

I think that most people want the high returns promised by proponents active management, because they don't want to save as much.

If they would save another 2-3% of their salary and put it into index funds, 99% of them would end up with a larger next egg.
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Post by Adrian Nenu »

Investors' goals should be to achieve specific financial goals, not to beat "the market". Portfolios should be set up to have the best odds of success with the lowest amount of risk, within each investor's risk tolerance range and ability to save.

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Sunny

Post by Petrocelli »

"Need" is the key word in your initial post.

I recently set up a value averaging spreadsheet. It showed that given the amount of money I had, and given my monthly contributions, I needed to earn 4.69% a year annualized to meet my retirement goals. That's what I need to retire.

However, when I set up the spreadsheet, I assumed that I assumed a 9.75% return. If i don't meet that goal, I have to add more money.

I "need" a 4.69% return. I "want" a 9.75% return. If I achieve it, I will retire with about twice as much money as I really need.

In another recent post, we discussed hot hands investing. Over the past 5 years, each $100,000 invested in the HH fund returned $223,251. That same amount invested in the 500 Index returned $66,793. So the HH investor made almost $160,000 more in a 5 year period on a $100,000 investment. If you invest that $160,000 wisely, that translates in to a lot of money in retirement.

Do I think I can beat "the market." I have beaten it by a good amount over the life of this forum. My Vanguard account has beaten my bogey (Lifestrategy Growth) by about 2.5% a year annualized for each of the last 5 years. That's a lot of money in retirement.

To answer your question: Why do I employ active investing strategies? Simple: More money is always better.
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Petro's fuzzy math

Post by frank_davis »

I have beaten it by a good amount over the life of this forum.
I seems no one takes the time to challenge you on your numbers.
Over the past 5 years, each $100,000 invested in the HH fund returned $223,251. That same amount invested in the 500 Index returned $66,793. So the HH investor made almost $160,000 more in a 5 year period on a $100,000 investment.
I interpret this as $100,000 ends up at $223,251 after five years in HH and
$100,000 ends up at $66,793 in the 500 Index.

I must interpret it this way because you are subtracting the result of HH and 500 Index to get the difference in performance dollars. 223251 - 66793 = {almost $160,000}

With the 500 Index, if $100,000 turned into $66,793 over the past five years, that would represent a -7.76% annual return. Using the numbers you supply for HH that would be 17.42% annual return. But the S&P 500 Index returned +12.58% annual return over the past five years.

Maybe you meant that 500 Index with an initial investment of $100,000 plus a gain of $66,793 would be $166,793 over the last five years. But this would be a 10.8% return not the actual 12.58% return.

When you claim you have "beaten it[500 Index ?] by a good amount over the life of this forum", I would go back and review your arithmetic. Wouldn't it be a shame if you were perennially under performing "it" due to false assumptions based on incorrect data and calculations?

Frank.
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Post by Elysium »

Over the past five years I invested in Small Value stocks. During this period each $100,000 invested in Small Value stocks returned $228,775, while 500 Index returned $176,236, and Petrocelli's hot hands fund returned $223,251. The Small Value investor made $5524 more than the hot hands investor, and $52,539 more than 500 Index. The Small Value investor can use that money to have a nice vacation in Paris, or buy a nice Mercedes. I have invested in small value stocks and emerging market value stocks over the last decade, because of that I am able to drive a brand new Mercedes every 3 years, I have a mansion on the upper east side of New York, and I have vacation homes in Southern France, and Bermuda. As a small value investor I have beaten the market consistently, and since I am richer I must be smarter.
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Richer is smarter?

Post by Taylor Larimore »

Hi Dieharder:
since I am richer I must be smarter.
I assume you are making a joke, because if you really believe what you said, you are not very smart.

Best wishes.
Taylor
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Post by sschullo »

Dieharder,
What is your prediction for the next five years?
Steve
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beating the average

Post by pkcrafter »

Hi Sunny,

If I could just sit on that curve through ups and down for a couple of decades, and do nothing else, I'd be in darn good shape. Who cares if I can or can't beat the market? I don't need to!

By not trying to beat the market you end up beating a very high percentage of active investors. Not trying is good. :)

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Re: Petro's fuzzy math

Post by Petrocelli »

frank_davis wrote:I would go back and review your arithmetic. Wouldn't it be a shame if you were perennially under performing "it" due to false assumptions based on incorrect data and calculations?
Frank:

Thanks for taking the time to review the numbers.

I did, in fact, make a typo in entering the returns in the spreadsheet. The correct amount total for $100,000 invested on January 1, 2003 is $81,433. I was off by $15,000.

I think this number is right, but please feel free to double check any numbers I post.

Thanks again.
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Post by Petrocelli »

Dieharder wrote:Over the past five years I invested in Small Value stocks. During this period each $100,000 invested in Small Value stocks returned $228,775, while 500 Index returned $176,236, and Petrocelli's hot hands fund returned $223,251. The Small Value investor made $5524 more than the hot hands investor, and $52,539 more than 500 Index.
Dieharder:

What small value investors are doing is trying to beat the market. Over the past 5 years, they have succeeded. Congratulations to them.
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Re: Petro's fuzzy math

Post by Petrocelli »

frank_davis wrote:
When you claim you have "beaten it[500 Index ?] by a good amount over the life of this forum", I would go back and review your arithmetic. Wouldn't it be a shame if you were perennially under performing "it" due to false assumptions based on incorrect data and calculations?
Frank:

My 5 year returns are based on the number taken from the Vanguard website. I also enter the 5 year return from M* for Lifestrategy Growth.

I am not sure how Vanguard calculates its returns, but I think they are accurate. In any event, those two numbers are the basis for my statement.
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Post by Elysium »

Taylor wrote:
I assume you are making a joke, because if you really believe what you said, you are not very smart.

Of course I am joking. I am simply trying to show the fallacy in Petrocelli's arguments. His posts typically are about some high risk strategy he is employing to beat the market, then he goes on to claim how rich he is, and how smart he is because of that. I just replaced Small Value stocks for whatever else Petrocelli usually brings up.

In another thread, I thought initially Petrocelli was unfairly compared to the wrong benchmark, but soon I realized he was not adjusting his returns for risk, a common mistake many investors do, especially when they are overconfident in their own abilities.

There are a number of ways to beat the market, all of them comes with high risk.

The original post is asking whether there is a need to take such risks. The answer depends on each individual's situation. Some investors have a need to take higher risks. That being said, there are uncompensated risks that can be avoided, such as market timing and performance chasing hot funds. The problem with such strategies are that those who follow them do not usually measure their success in a scientific manner, they usually rely on hype and exaggeration, and are probably overconfident in their abilities.
Last edited by Elysium on Sat Dec 15, 2007 12:05 pm, edited 1 time in total.
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Post by Elysium »

Dieharder,
What is your prediction for the next five years?
Steve
My prediction for the next five years is that the market will fluctuate :wink:
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Post by Petrocelli »

Dieharder wrote:[His posts typically are about some high risk strategy he is employing to beat the market, then he goes on to claim how rich he is, and how smart he is because of that. I just replaced Small Value stocks for whatever else Petrocelli usually brings up....

There are a number of ways to beat the market, all of them comes with high risk.
I am rich and smart, and also handsome, but that is not the subject of this particular post.

The initial question is: Why anything but TSM?

The answer: You want to try to beat TSM, because you want more money.

Pretty simple.

I have now been posting around here and the "other" forum for about 7 years now. We have discussed ways of beating TSM. I have proposed things using active funds, following Dan Wiener's portfolios, or using a smidgen of HH investing to juice returns.

Over the last 5 years or so, people who have done these things have made more money than TSM investors. Are these tactics more "risky"? Maybe, but both Dan Wiener's growth portfolio and the HH fund lost a lot less money than TSM during the last bear market, so I really don't know how to define risk.

Like you, I have no idea what will happen in the future. I only know what has worked in the past.

Once again, my belief is that going forward, a portfolio of low cost active and index funds, with a smidgen of market timing, will beat a 3 fund index based portfolio bought, held and rebalanced. I invest my money consistently with that belief. Others invest differently. That's OK.
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Post by frank_davis »

Petrocelli original post:
In another recent post, we discussed hot hands investing. Over the past 5 years, each $100,000 invested in the HH fund returned $223,251. That same amount invested in the 500 Index returned $66,793.
Now you claim the 500 Index would have returned $81,433. But you are still neglecting to add the original $100,000 back to the gains for a total of $181,433. Now when you compare your claimed HH annual return over the past five years of 17.42%(Are you sure about that?) or $223,251 total value after five years, now we are talking $223,251 - $181,433 = $41,818 advantage of HH over 500 Index. Your original post quoted about $160,000 advantage of HH over 500 Index.

I am rich and smart, and also handsome, but that is not the subject of this particular post.
Rich and handsome, huh? Lucky guy.:roll:

Frank.
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Post by Adrian Nenu »

I am amazed that people still compare multi-asset class portfolios to the S&P 500 or TSM. It must make them feel better about their fund picking abilities. Classic Wall Street investing porn.

Well, I have decided to compare my portfolio to REIT index which is down for the year. I have a positive return therefore I must be much smarter than the average investor. Yep, that makes a lot of sense :wink:

Adrian
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Post by Gregory »

[quote="Petrocelli"][quote="Dieharder"][His posts typically are about some high risk strategy he is employing to beat the market, then he goes on to claim how rich he is, and how smart he is because of that. I just replaced Small Value stocks for whatever else Petrocelli usually brings up....

There are a number of ways to beat the market, all of them comes with high risk.
[/quote]

I am rich and smart, and also handsome, but that is not the subject of this particular post.

The initial question is: Why anything but TSM?

The answer: You want to try to beat TSM, because you want more money.

Pretty simple.

I have now been posting around here and the "other" forum for about 7 years now. We have discussed ways of beating TSM. I have proposed things using active funds, following Dan Wiener's portfolios, or using a smidgen of HH investing to juice returns.

Over the last 5 years or so, people who have done these things have made more money than TSM investors. Are these tactics more "risky"? Maybe, but both Dan Wiener's growth portfolio [i]and [/i]the HH fund lost a lot less money than TSM during the last bear market, so I really don't know how to define risk.

Like you, I have no idea what will happen in the future. I only know what has worked in the past.

Once again, my belief is that going forward, a portfolio of low cost active and index funds, with a smidgen of market timing, will beat a 3 fund index based portfolio bought, held and rebalanced. I invest my money consistently with that belief. Others invest differently. That's OK.[/quote]
----------------------------------------
Smart, rich and handsome....
OK, but in a related vein (when people were discussing cars) you mentioned your Mercedes C Class. That implies you're either short (a tall guy would need regular chiropractic help if he drove a C Class regularly) or could not pony up for the E or S Class.

:wink:
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Post by biasion »

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Post by Petrocelli »

frank_davis wrote:Now when you compare your claimed HH annual return over the past five years of 17.42%(Are you sure about that?) or $223,251 total value after five years, now we are talking $223,251 - $181,433 = $41,818 advantage of HH over 500 Index. Your original post quoted about $160,000 advantage of HH over 500 Index.
I have the HH fund at $323,251 as of last week when I did the spreadsheet. I reran the numbers, and as of this morning, the total is at $313,593. Thus, the $100,000 invested for 5 years has resulted in a total gain of $213,593.
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Post by Petrocelli »

Gregory wrote: OK, but in a related vein (when people were discussing cars) you mentioned your Mercedes C Class. That implies you're either short (a tall guy would need regular chiropractic help if he drove a C Class regularly) or could not pony up for the E or S Class.
I am not tall, but I can see over the steering wheel with a phone book.

It's not that I "could" not pony up for a S class, I "would" not pony up for an S class.

Actually, FYI, a C280 with few options is not that expensive. It costs about $5,000 more than a loaded Prius.
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Post by Bounca »

bye
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Post by Petrocelli »

Bounca wrote:bye
Goodbye.
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Post by biasion »

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Post by Chas »

Hi Petro,

Five years is nothing in regard to establishing any kind of investing track record. A twenty year record of beating the TSM means you are really, really, lucky with the dice or that you can research the past records well. You will finally have gained some true understanding when you come to know, deep down in your bones, that accepting ones ignorance is the beginning of wisdom and that past returns really, really, really don't mean anything. :wink:

Chas
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Post by Petrocelli »

Chas wrote:...past returns really, really, really don't mean anything.
Two thoughts:

1. They mean something if you got them.

2. I believe momentum in the stock market exists. We have had run ups in large growth, followed by value, and followed by international.
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Do I need to beat the market?

Post by mjfrad »

Sunny's post prompted a slightly different train of thought in my mind.

Achieving at least near-market returns (market return less expenses+taxes) for any specific risk level, is essentially a given for most of the already quite sophisticated contributors to this forum. Many of the posts and discussions really hinge on ways to eek out efficiencies or to optimize strategies.

It seems to me that the key is to NOT perform less than the market in one's portfolio - winning the loser's game. I think in some way, market returns are a proxy for economic progress of society and ultimately ties in to our perceived quality of life. Not falling behind with the hard-saved money we are fortunate enough to invest, feels more important to me than beating a bench mark.

mjf
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More Petrocelli spreadsheet entertainment

Post by frank_davis »

Petrocelli quote:
I have the HH fund at $323,251 as of last week when I did the spreadsheet. I reran the numbers, and as of this morning, the total is at $313,593. Thus, the $100,000 invested for 5 years has resulted in a total gain of $213,593.
This now clarifies his original post.

Do you realize that this corresponds to a 5 year annualized return of 25.68% :shock:

In your original post you claimed a total gain of $223,251. Here you now claim a total gain of $213,593 with no explanation for the discrepancy. Which one is correct :?:
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Post by bilperk »

Petrocelli wrote:
Chas wrote:...past returns really, really, really don't mean anything.
Two thoughts:

1. They mean something if you got them.

2. I believe momentum in the stock market exists. We have had run ups in large growth, followed by value, and followed by international.
Chas:

I retired last year. Believe me, past returns really, really, mean something. Really.

best,
Bill
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Re: More Petrocelli spreadsheet entertainment

Post by baw703916 »

frank_davis wrote:Petrocelli quote:
I have the HH fund at $323,251 as of last week when I did the spreadsheet. I reran the numbers, and as of this morning, the total is at $313,593. Thus, the $100,000 invested for 5 years has resulted in a total gain of $213,593.
This now clarifies his original post.

Do you realize that this corresponds to a 5 year annualized return of 25.68% :shock:

In your original post you claimed a total gain of $223,251. Here you now claim a total gain of $213,593 with no explanation for the discrepancy. Which one is correct :?:
Well. a value of $223K last week and a value of $213K this week corresponds to a market drop of about 4%. The markets did drop a few % this past week, so this doesn't seem unreasonable.

For reference, the DFA-based slice and dice all equity "90" portfolio at IFA.com had an annualized return of 25.1% from 2003-2006 (it's a little harder to reconstruct the data over a five year time period that doesn't correspond to calendar years).

So yes, that's a good return, but the five year period is fortuitous: the S&P hit its bottom in late 2002, almost exactly 5 years ago. Almost any portfolio with a good helping of small/value/international/emerging markets would have had a very good return these last five years.

Best wishes,
Brad
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Post by Chas »

bilperk wrote:
Petrocelli wrote:
Chas wrote:...past returns really, really, really don't mean anything.
Two thoughts:

1. They mean something if you got them.

2. I believe momentum in the stock market exists. We have had run ups in large growth, followed by value, and followed by international.
Chas:

I retired last year. Believe me, past returns really, really, mean something. Really.

best,
Okay, to clarify. If you accept the efficient market theory, then the value of any equity at the moment is that which the market has determined with all available information factored in. Variations are simply noise which may, or may not, produce a gain above the fair market if you purchase, just as in throwing dice. That any given equity comparatively outperformed, or underperformed in the past, is also the result of the luck of the dice. In other words, just because you won in Las Vegas yesterday is really, really, really, not an indicator that you will likewise clean up there today. Once you accept that understanding deep down in your bones you are freed from chasing past returns and can turn to better ideas about investing and you can smile when the various investors brag about their prowess in the market in the same way you (hopefully) would smile at the guy that comes back from Vegas (supposedly) a winner. :wink:

Now, being the humans that we are, there is always that tinny little doubt in our minds that the guy that threw sevens ten times in a row is onto something and will throw a seven on the eleventh throw..... but don't bet the farm on that!

Chas
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Bad with numbers

Post by indexnerd »

Hey Petrocelli, ever heard of the Beardstown Ladies? :lol:
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Post by BlueEars »

Petrocelli wrote: I am rich and smart, and also handsome, but that is not the subject of this particular post.
Petrocelli, are you married? I know of a few eligible females :) .

On a more serious note, is Weiner's portfolio now tilted to LG? I know you can't post the portfolio here but am wondering what an M* style box picture would show.
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Post by Petrocelli »

Les wrote:On a more serious note, is Weiner's portfolio now tilted to LG? I know you can't post the portfolio here but am wondering what an M* style box picture would show.
Although I wish to respond, I don't wish to discuss that subject on this forum.

If you post the question at Morningstar's Vanguard Diehard forum, I will respond to it fully and promptly.

Here's a link:

http://socialize.morningstar.com/NewSoc ... Forum.aspx
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