Anyone beating the index instead of buying it?

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alex123711
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Anyone beating the index instead of buying it?

Post by alex123711 » Sat Jan 12, 2019 9:11 pm

Just wondering if many people are buying shares rather than index funds and if so are you beating the index? Would you be better off putting it in the index?

Global100
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Re: Anyone beating the index instead of buying it?

Post by Global100 » Sat Jan 12, 2019 9:14 pm

Some Bogleheads tilt their index funds (e.g. small cap, etc) and do better than the S&P for the year.

https://www.bogleheads.org/wiki/Slice_and_dice
Slice and dice is more complex than a "total market" approach, as slice and dice portfolios require more attention and more frequent rebalancing than simpler portfolios. The debate boils down to how large the benefit is, whether it is possible to prove unequivocally that there really is a benefit, and, even if so, whether it is worth the effort.

Silk McCue
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Re: Anyone beating the index instead of buying it?

Post by Silk McCue » Sat Jan 12, 2019 9:21 pm

Global100 wrote:
Sat Jan 12, 2019 9:14 pm
Some Bogleheads tilt their index funds (e.g. small cap, etc) and do better than the S&P for the year.
What about for the next decade?

I see no useful purpose in the OPs post. Either do or don’t.

Cheers

Global100
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Re: Anyone beating the index instead of buying it?

Post by Global100 » Sat Jan 12, 2019 9:23 pm

Exactly why I included the words "for the year."

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JoMoney
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Re: Anyone beating the index instead of buying it?

Post by JoMoney » Sat Jan 12, 2019 9:24 pm

More than 10 years ago now, I used to have an individual stock portfolio. I know on a total return basis, and ignoring taxes on my trading, I was doing a little better than the S&P 500 for the years 2001-2007.
I should also note, that I have no idea how I compared on a "risk adjusted" basis, and I suspect I was taking additional risks relative to a broad market index.
I'll also point out, that smaller (and mid) cap stocks did better than large over this period, and it tends to be easier to be a stock picker (relative to market cap weighted index) when that happens because very few stocks are larger than the median market-cap of the market.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Silk McCue
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Re: Anyone beating the index instead of buying it?

Post by Silk McCue » Sat Jan 12, 2019 9:25 pm

Global100 wrote:
Sat Jan 12, 2019 9:23 pm
Yep, that's why I included the words "for the year."
I invest for a lifetime, not for a year. That’s just a hash mark along the way.

Cheers

Global100
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Re: Anyone beating the index instead of buying it?

Post by Global100 » Sat Jan 12, 2019 9:29 pm

OP didn't give horizon.

Though I believe "shares" refers to individual stock investing.

Here's a thread for the OP to glance over called "What are you up YTD?": viewtopic.php?t=145610

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hdas
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Re: Anyone beating the index instead of buying it?

Post by hdas » Sat Jan 12, 2019 9:46 pm

At the beginning of last year I set up a portfolio of large cap momentum. 20 stocks. I was doing slightly better than my benchmark (MTUM), the experiment lasted for about 3 months and closed it because it wasn’t worth my time. I still want to try it again in the future.

Many ways to skin the cat

Cheers :greedy
Last edited by hdas on Sun Jan 13, 2019 9:08 am, edited 1 time in total.
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Luckywon
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Re: Anyone beating the index instead of buying it?

Post by Luckywon » Sat Jan 12, 2019 9:53 pm

The average stock picker does not beat the indexes. I'd go with that more than anecdotes you read here.

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Silly Wabbit
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Re: Anyone beating the index instead of buying it?

Post by Silly Wabbit » Sat Jan 12, 2019 10:14 pm

JoMoney wrote:
Sat Jan 12, 2019 9:24 pm
...because very few stocks are larger than the median market-cap of the market.
~50% of stocks are larger than the median..

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alex123711
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Re: Anyone beating the index instead of buying it?

Post by alex123711 » Sat Jan 12, 2019 10:24 pm

Sorry I meant to say annualised over long term so atleast 5+ years prefereably 10+. I know a few famous value investors do but you don't really hear many stories about smaller investors.. if you can consistently beat the index by a couple of % it adds up to a lot over the long term.

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JoMoney
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Re: Anyone beating the index instead of buying it?

Post by JoMoney » Sat Jan 12, 2019 11:00 pm

Silly Wabbit wrote:
Sat Jan 12, 2019 10:14 pm
JoMoney wrote:
Sat Jan 12, 2019 9:24 pm
...because very few stocks are larger than the median market-cap of the market.
~50% of stocks are larger than the median..
Not quite, the "Median market cap" of Total Stock Market is $72.5 billion
Of the 3639 stocks in the fund, only about 80 are bigger than that.

We're measuring "the market" by weight here, not by number of individual stocks.
Half the market is the top 80 by weight.
"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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Horton
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Re: Anyone beating the index instead of buying it?

Post by Horton » Sat Jan 12, 2019 11:06 pm

There may be, but there aren’t “many” and there are no guarantees it will continue in the future. I would recommend investing your time elsewhere.
Last edited by Horton on Sat Jan 12, 2019 11:25 pm, edited 1 time in total.
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am
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Re: Anyone beating the index instead of buying it?

Post by am » Sat Jan 12, 2019 11:12 pm

Most stocks do worse than the s&p 500. Good luck trying to find the few that do.

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Re: Anyone beating the index instead of buying it?

Post by whodidntante » Sat Jan 12, 2019 11:29 pm

Which index? And is this personal/actionable or is the OP just trying to get us to argue?

KlangFool
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Re: Anyone beating the index instead of buying it?

Post by KlangFool » Sat Jan 12, 2019 11:45 pm

alex123711 wrote:
Sat Jan 12, 2019 10:24 pm
Sorry I meant to say annualised over long term so atleast 5+ years prefereably 10+. I know a few famous value investors do but you don't really hear many stories about smaller investors.. if you can consistently beat the index by a couple of % it adds up to a lot over the long term.
alex123711,

<< if you can consistently beat the index by a couple of % >>

1) What is your threshold of a couple of %? 1%? 2%? 3%?

<<it adds up to a lot over the long term.>>

2) No, it does not matter.

We can do a simple mental exercise to prove this.

A) Tell me what do you mean by beating the index. Give me your number: 1%, 2%, 3%?

B) Tell me what is the percentage of your portfolio that you are putting into this gamble.

C) I can mathematically prove to you why this is a lousy bet.

KlangFool

Luckywon
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Re: Anyone beating the index instead of buying it?

Post by Luckywon » Sun Jan 13, 2019 12:37 am

Oh boy, here we go :beer

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Silly Wabbit
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Re: Anyone beating the index instead of buying it?

Post by Silly Wabbit » Sun Jan 13, 2019 12:58 am

JoMoney wrote:
Sat Jan 12, 2019 11:00 pm
Silly Wabbit wrote:
Sat Jan 12, 2019 10:14 pm
JoMoney wrote:
Sat Jan 12, 2019 9:24 pm
...because very few stocks are larger than the median market-cap of the market.
~50% of stocks are larger than the median..
Not quite, the "Median market cap" of Total Stock Market is $72.5 billion
Of the 3639 stocks in the fund, only about 80 are bigger than that.

We're measuring "the market" by weight here, not by number of individual stocks.
Half the market is the top 80 by weight.
I don't follow. Isn't median the mid-point, not the mean?
https://www.nasdaq.com/investing/glossa ... market-cap

Edit: I follow

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alex123711
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Re: Anyone beating the index instead of buying it?

Post by alex123711 » Sun Jan 13, 2019 2:57 am

KlangFool wrote:
Sat Jan 12, 2019 11:45 pm
alex123711 wrote:
Sat Jan 12, 2019 10:24 pm
Sorry I meant to say annualised over long term so atleast 5+ years prefereably 10+. I know a few famous value investors do but you don't really hear many stories about smaller investors.. if you can consistently beat the index by a couple of % it adds up to a lot over the long term.
alex123711,

<< if you can consistently beat the index by a couple of % >>

1) What is your threshold of a couple of %? 1%? 2%? 3%?

<<it adds up to a lot over the long term.>>

2) No, it does not matter.

We can do a simple mental exercise to prove this.

A) Tell me what do you mean by beating the index. Give me your number: 1%, 2%, 3%?

B) Tell me what is the percentage of your portfolio that you are putting into this gamble.

C) I can mathematically prove to you why this is a lousy bet.

KlangFool
I'm not trying to say I'm right or wrong, just curious and the principles of value investing make sense. I have read about investors beating the index with 100% stock long term but not sure if these are outliers, I would say 3% above the index would be beating the index and I'm talking 3% on an annualised basis and long term.

KlangFool
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Re: Anyone beating the index instead of buying it?

Post by KlangFool » Sun Jan 13, 2019 7:55 am

alex123711 wrote:
Sun Jan 13, 2019 2:57 am
KlangFool wrote:
Sat Jan 12, 2019 11:45 pm
alex123711 wrote:
Sat Jan 12, 2019 10:24 pm
Sorry I meant to say annualised over long term so atleast 5+ years prefereably 10+. I know a few famous value investors do but you don't really hear many stories about smaller investors.. if you can consistently beat the index by a couple of % it adds up to a lot over the long term.
alex123711,

<< if you can consistently beat the index by a couple of % >>

1) What is your threshold of a couple of %? 1%? 2%? 3%?

<<it adds up to a lot over the long term.>>

2) No, it does not matter.

We can do a simple mental exercise to prove this.

A) Tell me what do you mean by beating the index. Give me your number: 1%, 2%, 3%?

B) Tell me what is the percentage of your portfolio that you are putting into this gamble.

C) I can mathematically prove to you why this is a lousy bet.

KlangFool
I'm not trying to say I'm right or wrong, just curious and the principles of value investing make sense. I have read about investors beating the index with 100% stock long term but not sure if these are outliers, I would say 3% above the index would be beating the index and I'm talking 3% on an annualised basis and long term.
What is your AA?

Do you plan to buy individual stock?

Or value index fund?

https://www.vanguard.com/us/insights/sa ... llocations

<<Historical Risk/Return (1926–2017)
Average annual return 8.8%
Best year (1933) 36.7%
Worst year (1931) –26.6%
Years with a loss 20 of 92>>

The basic 60/40 portfolio has an average annual return of 8.8%. So, please explain to me why are you trying to gain by gambling on individual stock?

A) How many percents of your portfolio will you be gambling on those stocks?

B) Show me mathematically how it would matter if you beat the market by 3% per year?

After you do all the calculation, you will find that it is a lousy bet. Even if you are right, it is a waste of time. So, why bother?

KlangFool

KlangFool
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Re: Anyone beating the index instead of buying it?

Post by KlangFool » Sun Jan 13, 2019 8:30 am

OP,

The answer is very simple.

Only one person, Warren Buffett. And, if you believe that he could do this in the future, you should buy his stock, BRK.A or BRK.B.

KlangFool

livesoft
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Re: Anyone beating the index instead of buying it?

Post by livesoft » Sun Jan 13, 2019 8:33 am

I posted this 10 days ago:
livesoft wrote:
Thu Jan 03, 2019 10:47 pm
Yep, there is no point in publishing personal data unless it underperforms the market averages so most others can smirk and nod with that knowing voice, "Yep, they coulda had a V-8!"

https://www.youtube.com/watch?v=ld8eAH0MW00

If you get ahead of the market averages, then the refrain will be, "Not enough years to be meaningful, just wait until next year or 10 years or give me at least 20 years of outperformance."

And even then, you just got lucky! (Unless your name is Warren Buffett.)

But that's the beauty of Bogleheads.org: They keep you on the holy path to glory.
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livesoft
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Re: Anyone beating the index instead of buying it?

Post by livesoft » Sun Jan 13, 2019 8:35 am

i will state this: While it is highly unlikely that one will beat a specific index over the long term, it is not impossible for many people to outperform* a benchmark of index funds that contains equities plus bonds, such as a 60/40 or 50/50 benchmark.

*But not by a couple % a year.
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Luckywon
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Re: Anyone beating the index instead of buying it?

Post by Luckywon » Sun Jan 13, 2019 11:15 am

alex123711 wrote:
Sat Jan 12, 2019 9:11 pm
Just wondering if many people are buying shares rather than index funds and if so are you beating the index? Would you be better off putting it in the index?

OP keep in mind that as a group, people have a (huge) bias for recalling and reporting their successes, not their failures.

You are not going to hear from many people who tried and failed miserably at stock picking and market timing. But they are out there.

Look at the YTD performance threads. The average reported ROI seems to significantly outperform the indexes.

After a large market drop, notice how many people report having a conservative AA, or that they had reduced their equity exposure prior to the drop. (This is usually done in the form of a humblebrag.) After a large market rise, of course you hear from the people who have almost nothing in bonds.

So if you are looking to hear from people who are beating the indexes, you do not have to look far, even on this site. But the fact remains, as an individual investor any effort to do so, especially by picking stocks, is highly unlikely to succeed.
Last edited by Luckywon on Sun Jan 13, 2019 11:33 am, edited 2 times in total.

dknightd
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Re: Anyone beating the index instead of buying it?

Post by dknightd » Sun Jan 13, 2019 11:19 am

alex123711 wrote:
Sat Jan 12, 2019 9:11 pm
Just wondering if many people are buying shares rather than index funds and if so are you beating the index? Would you be better off putting it in the index?
I'm pretty sure somebody are beating the indexes. I'm also pretty sure some are loosing. Do you feel lucky?

anil686
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Re: Anyone beating the index instead of buying it?

Post by anil686 » Sun Jan 13, 2019 1:19 pm

I think beating the index by 3% annually is very difficult to do over let’s say 30-50 years. I don’t know how long your time horizon is - but for many in their 20s and 30s - it could very well be over 60 years. I guess the first step is to understand than there are different indices and using a custom benchmark for your portfolio of stocks would be important in terms of “beating the index”. After all, if you invest in all small cap stocks individually and compare that to the SP 500 - I don’t think that is a valid comparison. However, within the same universe of investments options - several things go against building your portfolio in a taxable account. For most in 401K plans, they have only mutual funds to choose from. In taxable accounts, you will owe long term and short term cap gains taxes on your investments - an important feature since most companies will not remain great investments for 60 years.

For individual stocks - there is more than just looking for value - you probably need to be looking for beat down value - like the type of value stocks nobody wants to touch. and then hope that the world is wrong about them and they exceed expectations. Behaviorally, that is difficult to do. Everybody wants to do that but does not have the stomach to do so.

I suggest reading the Little Book of Common Sense Investing by Bogle and Chapters 6 and 12 of Common Sense on Mutual Funds by Bogle to get an understanding of how difficult a task it is to beat the market by a significant amount year over year. JMO though...

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Earl Lemongrab
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Re: Anyone beating the index instead of buying it?

Post by Earl Lemongrab » Sun Jan 13, 2019 2:02 pm

One of the core principles of my investing plan is that I have no talent for stock-picking. I'm not sure anyone does, but I know I don't. So it's not a concern for me.

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arcticpineapplecorp.
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Re: Anyone beating the index instead of buying it?

Post by arcticpineapplecorp. » Sun Jan 13, 2019 2:06 pm

if you did, you'd be under the assumption that you must know more than the market. Do you?

If you did, you'd be under the assumption that you must be better than average. Are you?

If you did, and you were therefore confident you'd beat the market, wouldn't you back up the truck and put every dollar of your investments (including those for retirement) into those stocks that are clearly going to beat the market? If not, are you beginning to see the flaw in your belief?
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

UKFred
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Re: Anyone beating the index instead of buying it?

Post by UKFred » Sun Jan 13, 2019 2:10 pm

My portfolio is split into two - half in broad UK and Global ex-UK funds that I let run and the other half in individual stocks that I manage myself by buying in and out. I have been doing this for about fifteen years, but initially the amounts were so small in relation to my salary that I didn't really measure my performance. But starting about six years ago, the portfolio (both halves) have become large enough to be really significant and I have been diligently measuring my performance against the FTSE 100, FTSE All Share and the funds portion.

Each of the last six years, I have beaten the indexes and the funds by 3-4%. My Sharpe Ratio is greater than 2, so I know I am not just taking extra risk for the performance. But I am always aware how robust the index performance is and how I am just one mistake away from losing all my out-performance. For every profitable trade, I have at least two others that cause a loss and one needs the ability to remain sanguine about it.

I am arrogant enough to assume that I can beat the market but also paranoid that I'll lose my touch at any time, which is why I have never pulled the trigger on managing my entire portfolio myself!

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Re: Anyone beating the index instead of buying it?

Post by tibbitts » Sun Jan 13, 2019 2:16 pm

alex123711 wrote:
Sat Jan 12, 2019 9:11 pm
Just wondering if many people are buying shares rather than index funds and if so are you beating the index? Would you be better off putting it in the index?
The purpose of asking is... ?

Obviously if someone is buying individual shares they do not believe they would be better off putting money in an index, so what is the purpose of asking that?

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alex123711
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Re: Anyone beating the index instead of buying it?

Post by alex123711 » Mon Jan 14, 2019 2:48 am

Thanks for the responses, as I said I'm not saying its better to try and beat the index just a discussion on how likely it is for an individual, i'm talking about long term buy and hold value investing by the way. There have been several books written for and against index funds over individual.
KlangFool wrote:
Sun Jan 13, 2019 8:30 am
OP,

The answer is very simple.

Only one person, Warren Buffett. And, if you believe that he could do this in the future, you should buy his stock, BRK.A or BRK.B.

KlangFool
There's more than one famous person

https://www8.gsb.columbia.edu/articles/ ... rinvestors
KlangFool wrote:
Sun Jan 13, 2019 7:55 am

<< if you can consistently beat the index by a couple of % >>

1) What is your threshold of a couple of %? 1%? 2%? 3%?

<<it adds up to a lot over the long term.>>

2) No, it does not matter.

We can do a simple mental exercise to prove this.

A) Tell me what do you mean by beating the index. Give me your number: 1%, 2%, 3%?

B) Tell me what is the percentage of your portfolio that you are putting into this gamble.

C) I can mathematically prove to you why this is a lousy bet.

KlangFool
As I mentioned 3% average compounded above the index would be good, are you able to prove this, as what you're saying makes no sense to me.

jminv
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Re: Anyone beating the index instead of buying it?

Post by jminv » Mon Jan 14, 2019 5:38 am

It is possible to beat an index in the short to medium term since the index is an average and people can do better or worse than the average by picking individual components of it. This follows a distribution so there happen to be a few people who do better than the index in the long run too since, luck. There are less efficient markets and sectors out there where something other than luck can play a role, but these are normally outside of the USA and they've become much more efficient over time.

Something to keep in mind is that are many different indexes, not just S&P 500 and Down Jones Industrial Average. People who claim to beat the market in the long run (and short to medium) tend to be comparing themselves against either the S&P500 or DJIA when a more appropriate comparison could be a different index. When their holdings are compared against the appropriate index, these claims hold less water. It's vitally important to compare claims of market beating performance versus the actual relevant index. People don't recognize this for a variety of different reasons but most of it has to do with wanting to say they 'beat the index' or to believe they are investing with someone with market beating skill. Similarly, people will compare the leveraged performance of their portfolio versus the unlevered performance of a benchmark.

tmcc
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Re: Anyone beating the index instead of buying it?

Post by tmcc » Mon Jan 14, 2019 6:46 am

KlangFool wrote:
Sat Jan 12, 2019 11:45 pm
alex123711 wrote:
Sat Jan 12, 2019 10:24 pm
Sorry I meant to say annualised over long term so atleast 5+ years prefereably 10+. I know a few famous value investors do but you don't really hear many stories about smaller investors.. if you can consistently beat the index by a couple of % it adds up to a lot over the long term.
<<it adds up to a lot over the long term.>>

2) No, it does not matter.
You're a smart guy and have some great thoughts but you're just dead wrong about this

An additional 50bp of CAGR over 10 years is a BIG difference

KlangFool
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Re: Anyone beating the index instead of buying it?

Post by KlangFool » Mon Jan 14, 2019 8:21 am

tmcc wrote:
Mon Jan 14, 2019 6:46 am
KlangFool wrote:
Sat Jan 12, 2019 11:45 pm
alex123711 wrote:
Sat Jan 12, 2019 10:24 pm
Sorry I meant to say annualised over long term so atleast 5+ years prefereably 10+. I know a few famous value investors do but you don't really hear many stories about smaller investors.. if you can consistently beat the index by a couple of % it adds up to a lot over the long term.
<<it adds up to a lot over the long term.>>

2) No, it does not matter.
You're a smart guy and have some great thoughts but you're just dead wrong about this

An additional 50bp of CAGR over 10 years is a BIG difference
No, it is not. Show me the number. And, I can prove it.

KlangFool

KlangFool
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Re: Anyone beating the index instead of buying it?

Post by KlangFool » Mon Jan 14, 2019 8:27 am

alex123711 wrote:
Mon Jan 14, 2019 2:48 am
Thanks for the responses, as I said I'm not saying its better to try and beat the index just a discussion on how likely it is for an individual, i'm talking about long term buy and hold value investing by the way. There have been several books written for and against index funds over individual.
KlangFool wrote:
Sun Jan 13, 2019 8:30 am
OP,

The answer is very simple.

Only one person, Warren Buffett. And, if you believe that he could do this in the future, you should buy his stock, BRK.A or BRK.B.

KlangFool
There's more than one famous person

https://www8.gsb.columbia.edu/articles/ ... rinvestors
KlangFool wrote:
Sun Jan 13, 2019 7:55 am

<< if you can consistently beat the index by a couple of % >>

1) What is your threshold of a couple of %? 1%? 2%? 3%?

<<it adds up to a lot over the long term.>>

2) No, it does not matter.

We can do a simple mental exercise to prove this.

A) Tell me what do you mean by beating the index. Give me your number: 1%, 2%, 3%?

B) Tell me what is the percentage of your portfolio that you are putting into this gamble.

C) I can mathematically prove to you why this is a lousy bet.

KlangFool
As I mentioned 3% average compounded above the index would be good, are you able to prove this, as what you're saying makes no sense to me.
OP,

You are not one of those that could beat the index consistently. So, why does it matters that someone else can?

Meanwhile, you can invest with Warren buffett, why won't you do that?

KlangFool

KlangFool
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Re: Anyone beating the index instead of buying it?

Post by KlangFool » Mon Jan 14, 2019 8:38 am

Folks,

https://www.vanguard.com/us/insights/sa ... llocations

<<Historical Risk/Return (1926–2017)
Average annual return 8.8%
Best year (1933) 36.7%
Worst year (1931) –26.6%
Years with a loss 20 of 92>>

This is the basic 60/40 portfolio with an average return of 8.8%. For those people that believe they could beat the index and do a lot better. Please explain how they will do it and why it is worth the gamble. Show me the numbers. Then, I will show them why they are wrong. It will be highly educational.

KlangFool

wbrianwhite
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Re: Anyone beating the index instead of buying it?

Post by wbrianwhite » Mon Jan 14, 2019 9:08 am

https://www.aaii.com/model-portfolios/s ... al-returns

Check this out if you're interested. It seems like more work than I wanted to do. It's a micro cap portfolio.

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HomerJ
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Re: Anyone beating the index instead of buying it?

Post by HomerJ » Mon Jan 14, 2019 9:49 am

alex123711 wrote:
Sat Jan 12, 2019 10:24 pm
Sorry I meant to say annualised over long term so atleast 5+ years prefereably 10+. I know a few famous value investors do but you don't really hear many stories about smaller investors.. if you can consistently beat the index by a couple of % it adds up to a lot over the long term.
Sure, but most people can't.

If you trail the index by a couple of % it adds up to a LOT LESS over the long-term.

Here's the thing. The 9%-10% historical long-term return of the stock market? That INCLUDES the crashes. Read that again.

You didn't have to avoid the bad years in the past to get a very good return, and become wealthy.

Sure, if you could pick just the winning stocks, and avoid the losing stocks, you'd make more. But that's not easy to do. It's just as easy to make less with that method, and it's a lot of work and stress.

Or you could just buy the index and get whatever the market returns over the long-term, and get back to the rest of your life.
The J stands for Jay

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HomerJ
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Re: Anyone beating the index instead of buying it?

Post by HomerJ » Mon Jan 14, 2019 9:55 am

KlangFool wrote:
Mon Jan 14, 2019 8:38 am
Folks,

https://www.vanguard.com/us/insights/sa ... llocations

<<Historical Risk/Return (1926–2017)
Average annual return 8.8%
Best year (1933) 36.7%
Worst year (1931) –26.6%
Years with a loss 20 of 92>>

This is the basic 60/40 portfolio with an average return of 8.8%. For those people that believe they could beat the index and do a lot better. Please explain how they will do it and why it is worth the gamble. Show me the numbers. Then, I will show them why they are wrong. It will be highly educational.

KlangFool
Klang, the OP posted a hypothetical that they would beat the index by 3% a year. You said it wouldn't matter.

Of course, we all agree with you that the CHANCES of beating the index by 3% a year are low. But you were confusing the issue by stating that even if the hypothetical was true, it still wouldn't matter.

But of course it would. Even an extra .5% compounded over many years is a big gain. But, of course, trying to get more, one is just as likely to get less, maybe even more likely to get less. And NEGATIVE 3% or even 0.5% compounded over many years is a big loss.

So we agree with you that it's not a good idea.
The J stands for Jay

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BoglePaul
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Re: Anyone beating the index instead of buying it?

Post by BoglePaul » Mon Jan 14, 2019 10:02 am

We purchase VPCCX instead of index funds (we purchased when it was open). It has beat the index for the previous 5 years, even after taxes.

We purchase VPCCX because we like the stocks in the fund.

KlangFool
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Re: Anyone beating the index instead of buying it?

Post by KlangFool » Mon Jan 14, 2019 10:12 am

HomerJ wrote:
Mon Jan 14, 2019 9:55 am

But of course it would. Even an extra .5% compounded over many years is a big gain.
HomerJ,

It would not in the context of personal finance. It is a small gain because we do not have millions to invest. If we take a real person like me that invest 60K per year, the additional 0.5% or 3% would not matter. Especially if we take into the account of the additional risk that we are taking.

With 60/40, I get 8.8%. The risk is that I can lose -26,6%

Let's assume that I have a stock that returns 12% per year, I get 3% more. But, the risk is I can lose 100% at any time.

My target number is 1.5 million. Investment is 5K per month.

With 8.8%, I can reach my number in 14 years. With 12%, I can reach my number in 12 years. So, I only gain 2 years. But, I take the risk of losing everything over that 12 years. It is a lousy bet!

So, please explain to me why would I gamble on a stock that returns 12% per year? I am guaranteed to lose.

A) Even if I am right, I only gain 2 years. Aka, when I win, it does not matter much.

B) If I am wrong, I lose everything.


Annual Return Rate 10 11 12 13 14
5.00% $754,674 $852,407 $955,028 $1,062,779 $1,175,918
6.00% $790,848 $898,299 $1,012,196 $1,132,928 $1,260,904
7.00% $828,987 $947,016 $1,073,307 $1,208,439 $1,353,029
8.88% $906,371 $1,046,857 $1,199,818 $1,366,362 $1,547,695
12.00% $1,052,924 $1,239,275 $1,447,988 $1,681,747 $1,943,556

KlangFool

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HomerJ
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Re: Anyone beating the index instead of buying it?

Post by HomerJ » Mon Jan 14, 2019 11:27 am

KlangFool wrote:
Mon Jan 14, 2019 10:12 am
With 8.8%, I can reach my number in 14 years. With 12%, I can reach my number in 12 years. So, I only gain 2 years. But, I take the risk of losing everything over that 12 years. It is a lousy bet!
Yes, of course, it's a lousy bet.

But that wasn't the question.

Your first response was confusing to the OP.

You said 3% more a year would not make a real difference. But, of course, it would, for most people. Even in your particular case, 2 more years of retirement is not insignificant.

But, also of course, 3% more a year is not guaranteed, and in fact, is very unlikely. That's your point, and I agree with it. You just didn't explain it very well in your first response, but I think we're all on the same page now.
The J stands for Jay

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Re: Anyone beating the index instead of buying it?

Post by KlangFool » Mon Jan 14, 2019 11:37 am

HomerJ wrote:
Mon Jan 14, 2019 11:27 am
KlangFool wrote:
Mon Jan 14, 2019 10:12 am
With 8.8%, I can reach my number in 14 years. With 12%, I can reach my number in 12 years. So, I only gain 2 years. But, I take the risk of losing everything over that 12 years. It is a lousy bet!
Yes, of course, it's a lousy bet.

But that wasn't the question.

Your first response was confusing to the OP.

You said 3% more a year would not make a real difference. But, of course, it would, for most people. Even in your particular case, 2 more years of retirement is not insignificant.

But, also of course, 3% more a year is not guaranteed, and in fact, is very unlikely. That's your point, and I agree with it. You just didn't explain it very well in your first response, but I think we're all on the same page now.
HomerJ,

My point which I did not say clearly is

A) It is a lousy bet to look at any stock that returns 12% per year.

B) If someone wants to gamble, he should look at the stock that has the possibility of returning 1,000% to 3,000%. Aka, 10X to 30X. Then, in that case, he just needs to gamble $5,000.

i) If he loses, he loses $5,000. It does not destroy him financially.

ii) If he wins, it is 50K to 150K. It matters to him financially.

In that case, it may be a worthwhile gamble.

KlangFool

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Re: Anyone beating the index instead of buying it?

Post by EfficientInvestor » Mon Jan 14, 2019 12:59 pm

OP,

It seems that you are ultimately trying to determine 1) is it possible to beat the market and 2) if it is possible, is it worth the time and effort? While it is possible to be a better than average stock picker (even if by luck), what kind of effort would it involve to ensure you will be better than average? My guess is it would be a pretty considerable effort and likely not worth the time. However, I believe there is a way to beat the market over the long term, but it has nothing to do with being a good stock picker. The key is to realize that the long term returns of the market are a very inefficient use of capital. By investing in a market index (S&P 500), you are looking at a long term annualized return of 10% and a max drawdown potential of 50%+. In comparison, consider a blend of 40% S&P 500 and 60% in a 10-year treasury bond fund. Here is a comparison of the two since 1972:

https://www.portfoliovisualizer.com/bac ... yNotes2=60

Jan 1972 - Dec 2018
S&P 500 - CAGR = 10.0%, Max DD = -51.0%
40/60 - CAGR = 8.7%, Max DD = -18.5%

By investing in the S&P, you would have had 15% more return per year but your max drawdown would have almost tripled.

Alternatively, you could consider leveraged indexing. If you apply leverage to the more efficient asset allocation, the result is a portfolio that provides better returns than the S&P 500 with less risk (max drawdown) than a standard 60/40 portfolio. Here is an example:

https://www.portfoliovisualizer.com/bac ... tion4_2=40

Jul 2006 - Dec 2018
2X 40/60 - CAGR = 11.3%, Max DD = -21.7%
60/40 - CAGR = 6.7%, Max DD = -30.8%
S&P 500 - CAGR = 7.7%, Max DD = -51.0%

I'm sure I will receive comments about how this is a small sample size and there is no guarantee that this trend will continue. However, as long as a 40/60 portfolio remains a much more efficient investment than a 100/0 portfolio, I believe this pattern will continue. In other words, as long as there is still a point on the 2X portfolio efficient frontier curve (red) that is up and to the left of the SPY (S&P 500) point on the efficient frontier, this will still hold true. See image and link below.

Image

https://www.portfoliovisualizer.com/eff ... X&sf4=true

tmcc
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Re: Anyone beating the index instead of buying it?

Post by tmcc » Mon Jan 14, 2019 6:14 pm

KlangFool wrote:
Mon Jan 14, 2019 8:21 am
tmcc wrote:
Mon Jan 14, 2019 6:46 am
KlangFool wrote:
Sat Jan 12, 2019 11:45 pm
alex123711 wrote:
Sat Jan 12, 2019 10:24 pm
Sorry I meant to say annualised over long term so atleast 5+ years prefereably 10+. I know a few famous value investors do but you don't really hear many stories about smaller investors.. if you can consistently beat the index by a couple of % it adds up to a lot over the long term.
<<it adds up to a lot over the long term.>>

2) No, it does not matter.
You're a smart guy and have some great thoughts but you're just dead wrong about this

An additional 50bp of CAGR over 10 years is a BIG difference
No, it is not. Show me the number. And, I can prove it.

KlangFool
https://www.portfoliovisualizer.com/bac ... ion2_2=100

same fund with and without a 1% ER over 10 years = $40k with a 100k starting balance and $1k/mo contribution.... 90bp CAGR spread. 2% is a huge difference.

KlangFool
Posts: 13422
Joined: Sat Oct 11, 2008 12:35 pm

Re: Anyone beating the index instead of buying it?

Post by KlangFool » Mon Jan 14, 2019 7:12 pm

tmcc wrote:
Mon Jan 14, 2019 6:14 pm
KlangFool wrote:
Mon Jan 14, 2019 8:21 am
tmcc wrote:
Mon Jan 14, 2019 6:46 am
KlangFool wrote:
Sat Jan 12, 2019 11:45 pm
alex123711 wrote:
Sat Jan 12, 2019 10:24 pm
Sorry I meant to say annualised over long term so atleast 5+ years prefereably 10+. I know a few famous value investors do but you don't really hear many stories about smaller investors.. if you can consistently beat the index by a couple of % it adds up to a lot over the long term.
<<it adds up to a lot over the long term.>>

2) No, it does not matter.
You're a smart guy and have some great thoughts but you're just dead wrong about this

An additional 50bp of CAGR over 10 years is a BIG difference
No, it is not. Show me the number. And, I can prove it.

KlangFool
https://www.portfoliovisualizer.com/bac ... ion2_2=100

same fund with and without a 1% ER over 10 years = $40k with a 100k starting balance and $1k/mo contribution.... 90bp CAGR spread. 2% is a huge difference.
tmcc,

Is that your real investment portfolio? The answer is obviously not.

For a real person and personal finance portfolio, everything has to be benchmarked against a basic 60/40 portfolio. The alternative has to be significantly better than 60/40 portfolio in order to justify the risk. 3% per year is not good enough.

A) In order to make a significant difference in the person's finance, the allocation has to be huge. Aka, 100%. But, the risk would be losing 100% of your portfolio.

B) On the other hand, even if the allocation is 100%, it would take many years (10 years) before 3% difference matters.

Don't gamble on something that the risk does not pay. It is a lousy bet.

The OP's question is does anyone beating the index. My answer is if by beating the index means that beating it by 3% per year, don't bother to start in the first place. It is not worth the effort. You have to be lucky for 10+ years before it matters. Meanwhile, you could lose everything in any of those 10+ years.

KlangFool

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goodenyou
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Re: Anyone beating the index instead of buying it?

Post by goodenyou » Mon Jan 14, 2019 8:01 pm

KlangFool wrote:
Mon Jan 14, 2019 7:12 pm
tmcc wrote:
Mon Jan 14, 2019 6:14 pm
KlangFool wrote:
Mon Jan 14, 2019 8:21 am
tmcc wrote:
Mon Jan 14, 2019 6:46 am
KlangFool wrote:
Sat Jan 12, 2019 11:45 pm


<<it adds up to a lot over the long term.>>

2) No, it does not matter.
You're a smart guy and have some great thoughts but you're just dead wrong about this

An additional 50bp of CAGR over 10 years is a BIG difference
No, it is not. Show me the number. And, I can prove it.

KlangFool
https://www.portfoliovisualizer.com/bac ... ion2_2=100

same fund with and without a 1% ER over 10 years = $40k with a 100k starting balance and $1k/mo contribution.... 90bp CAGR spread. 2% is a huge difference.
tmcc,

Is that your real investment portfolio? The answer is obviously not.

For a real person and personal finance portfolio, everything has to be benchmarked against a basic 60/40 portfolio. The alternative has to be significantly better than 60/40 portfolio in order to justify the risk. 3% per year is not good enough.

A) In order to make a significant difference in the person's finance, the allocation has to be huge. Aka, 100%. But, the risk would be losing 100% of your portfolio.

B) On the other hand, even if the allocation is 100%, it would take many years (10 years) before 3% difference matters.

Don't gamble on something that the risk does not pay. It is a lousy bet.

The OP's question is does anyone beating the index. My answer is if by beating the index means that beating it by 3% per year, don't bother to start in the first place. It is not worth the effort. You have to be lucky for 10+ years before it matters. Meanwhile, you could lose everything in any of those 10+ years.

KlangFool
The House always wins. The longer you gamble, the greater chance you will lose.
"Ignorance more frequently begets confidence than does knowledge" | "The best years you have left are the ones you have right now"

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alex123711
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Re: Anyone beating the index instead of buying it?

Post by alex123711 » Mon Jan 14, 2019 8:31 pm

KlangFool wrote:
Mon Jan 14, 2019 7:12 pm
It is not worth the effort. You have to be lucky for 10+ years before it matters. Meanwhile, you could lose everything in any of those 10+ years.

KlangFool
I don't see how you could lose everything, unless you put everything into one stock, which I'm not advocating. If you put into at least 8 good quality stocks I don't see how all could go bankrupt, especially within the same year.

tmcc
Posts: 311
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Re: Anyone beating the index instead of buying it?

Post by tmcc » Mon Jan 14, 2019 8:37 pm

KlangFool wrote:
Mon Jan 14, 2019 7:12 pm
tmcc wrote:
Mon Jan 14, 2019 6:14 pm
KlangFool wrote:
Mon Jan 14, 2019 8:21 am
tmcc wrote:
Mon Jan 14, 2019 6:46 am
KlangFool wrote:
Sat Jan 12, 2019 11:45 pm


<<it adds up to a lot over the long term.>>

2) No, it does not matter.
You're a smart guy and have some great thoughts but you're just dead wrong about this

An additional 50bp of CAGR over 10 years is a BIG difference
No, it is not. Show me the number. And, I can prove it.

KlangFool
https://www.portfoliovisualizer.com/bac ... ion2_2=100

same fund with and without a 1% ER over 10 years = $40k with a 100k starting balance and $1k/mo contribution.... 90bp CAGR spread. 2% is a huge difference.
tmcc,

Is that your real investment portfolio? The answer is obviously not.

For a real person and personal finance portfolio, everything has to be benchmarked against a basic 60/40 portfolio. The alternative has to be significantly better than 60/40 portfolio in order to justify the risk. 3% per year is not good enough.

A) In order to make a significant difference in the person's finance, the allocation has to be huge. Aka, 100%. But, the risk would be losing 100% of your portfolio.

B) On the other hand, even if the allocation is 100%, it would take many years (10 years) before 3% difference matters.

Don't gamble on something that the risk does not pay. It is a lousy bet.

The OP's question is does anyone beating the index. My answer is if by beating the index means that beating it by 3% per year, don't bother to start in the first place. It is not worth the effort. You have to be lucky for 10+ years before it matters. Meanwhile, you could lose everything in any of those 10+ years.

KlangFool
I understand your argument on risk versus reward. Let's acknowledge that total collapse of US stocks would be catastrophic for whatever bond allocation you think is safe within 60/40.

However, please further acknowledge that your claim was that 50bp of CAGR over 10 years doesn't matter. It obviously does... now whether or not you, personally, think its worth it is a different matter!

KlangFool
Posts: 13422
Joined: Sat Oct 11, 2008 12:35 pm

Re: Anyone beating the index instead of buying it?

Post by KlangFool » Mon Jan 14, 2019 8:39 pm

alex123711 wrote:
Mon Jan 14, 2019 8:31 pm
KlangFool wrote:
Mon Jan 14, 2019 7:12 pm
It is not worth the effort. You have to be lucky for 10+ years before it matters. Meanwhile, you could lose everything in any of those 10+ years.

KlangFool
I don't see how you could lose everything, unless you put everything into one stock, which I'm not advocating. If you put into at least 8 good quality stocks I don't see how all could go bankrupt, especially within the same year.
alex123711,

How many stocks go to hell in 2008/2009 recession? In every recession?

<<If you put into at least 8 good quality stocks I don't see how all could go bankrupt, especially within the same year.>>

Your bet only pays off if all 8 stocks survive 10 years and so much better than the market.

GE was a good quality stock.

KlangFool

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