Active management by individual investors is a Loser's Game

[660ky612]

Dear Forum,

The books I read so far focus on the "active mutual fund vs. passive fund" debate. It took time for me to ask the right question.

Before recommending low-expenses index funds to the general investing public, one must settle the question:
Active management by individual investors is a Loser's Game (stock picking, gurus' advices, market timing, chasing hot-fund manager, market newsletters; magazines; newspapers) all don't work!

Please provide some evidences: articles, references, book excerpts, etc.

Thanks, 660ky612 from Hong Kong

PS. (stock picking, gurus' advices, market timing, chasing hot-fund manager, market newsletters; magazines) i.e. Active Management are things that every investor at Hong Kong is now busy with - they are doing the HW. In addition, many gurus sell tutorial classes, i.e. investors must learn how to do the homework.

[DaveTH]

Please provide some evidences: articles, references, book excerpts, etc.

Have you tried doing a Google search? I'm sure you will find several articles on the debate. Or, simply read John Bogle's latest book "The Little Book of Common Sense Investing". The vast majority of active fund manager's cannot consistently beat passive investing on an after-tax, after-cost basis. The key is low cost and low turnover (lower capital gains).

[660ky612]

Please provide some evidences: articles, references, book excerpts, etc.

Have you tried doing a Google search? I'm sure you will find several articles on the debate.

Sometimes a web search is not that appropriate, because it is reinventing the wheel.

Or, simply read John Bogle's latest book "The Little Book of Common Sense Investing". The vast majority of active fund manager's cannot consistently beat passive investing on an after-tax, after-cost basis. The key is low cost and low turnover (lower capital gains).

For books that I have already read, see http://diehards.org/forum/viewtopic.php ... ght=#69897

Please note that in this question, I am asking a lot more, and I have plans to compile a nice list, such as those in http://diehards.org/forum/viewtopic.php?t=172

For example:

Active fund cannot beat the market --- see standard finance textbook such as BODIE's Investment OR BREALEY's Corporate Finance.

Moreover, attention must be drawn to "what are evidences".

660ky612 from Hong Kong

[DaveTH]

If you have read the articles and the books on the subject, what additional evidence are you seeking? I provided you with one reference and I am sure that you can find more if you are willing to do the research.

[biasion]

[removed]

[Taylor Larimore]

Active management is a Loser's Game. --
Please provide some evidences: articles, references, book excerpts, etc.

Thanks, 660ky612 from Hong Kong

I will give you evidence with excerpts and sources in a new Conversation.

Best wishes.
Taylor

[Rodc]

Seems to me you have it upside down: before selling someone on spending extra money on a fancier product you have to have some evidence the money would be well spent.

I don't know about you, but if a salesman wants me to spend extra he has to show me why that is a good idea.

[mesaverde]

The only continued winner was Fidelity's Contrafund, and even there you have no guarantee it will continue to do as well the next 30 years that it has the last 30.

Good point, and might I also add that because this fund did so well and people poured their money in, it has been closed for some time...

So even if an investor today somehow "just knew" this fund would continue to perform well during the next 20-30 years, they cannot invest in the fund.

[larryswedroe]

The best source is simply the studies by Terrance Odean and Brad Barber---a whole series of them

I cite them in my various books or you can search the Internet and find them

Also M* did recent study and found that the average individual mutual fund investor significantly underperformed the very funds they invested in (which underperformed the market to begin with) by their trading activities--tend to buy AFTER outperformance and SELL AFTER underperformance. This was true of every single fund family with one exception.DFA which requires that you work through an intermediary, a RIA to keep investor disciplined to a plan.

[bzboy]

Active management by fund managers is bound to fail because of the misalignment of interests. Investors want performance and manages want AUM (Assets under management).

So, to managers performance is a means to get to the AUM.

This is sad but it's the reality.

bz

[simba]

Did you check the reference library for the active vs passive investing thread?

Here's a link to the research papers by Terrance Odean.

Regards,
Simba

[Gauss]

660ky612 from Hong Kong,


Stock pickers may be individual investors, market gurus, analysts(so-called) and fund managers.

The market gurus in the media inform or teach the general investing public
. stock news and events, jargons (vocabulary), stock fundamental;
. obtain profit, cut-loss, technical analysis;
. beware of risk;
. IQ, EQ.


Visit Hebner's book Chapter 3 stock pickers


When the good news come, you do not own that stock. When the bad news arrive, what to do with your stock?
What you should do depends on your risk tolerance and this is the reason why gurus cannot help you sometimes.

Buy-and-sell and make you own decisions.

Good! Excellent! Listen to them and spend you whole life!

Gauß

[Michael Weiss]

Also M* did recent study and found that the average individual mutual fund investor significantly underperformed the very funds they invested in (which underperformed the market to begin with) by their trading activities--tend to buy AFTER outperformance and SELL AFTER underperformance. This was true of every single fund family with one exception.DFA which requires that you work through an intermediary, a RIA to keep investor disciplined to a plan.

Larry,

What time period was covered in the study. If you look at the 5 year period ending 9/30/07, a period that coincides with most of DFA's mutual fund assets coming in the door, not one DFA equity fund has a 5 year investor return which was greater than its 5 year total return. In fact, many of their equity funds had investor returns that were considerably lower than the actual fund returns . Further, if you look at DFA's investor versus actual return dispersion versus that of no load funds, it is less than impressive. When just eyeballing some of DFA's largest funds, it looks many of the funds did worse than their no load competitors in terms of investor versus actual dispersion.

Michael

[Richard Berg]

http://faculty.haas.berkeley.edu/odean/ ... search.htm
http://www.dalbarinc.com/content/printe ... 2001062100
http://papers.ssrn.com/sol3/papers.cfm? ... _id=892743
http://papers.ssrn.com/sol3/papers.cfm? ... _id=931180
http://www.marketwatch.com/News/Story/S ... t=printTop

If that's not enough, just go to SSRN and search for more papers on investor performance. There are thousands.

[Gauss]

660ky612 from Hong Kong,

Stock pickers may be individual investors, market gurus, analysts(so-called) and fund managers.

The market gurus in the media inform or teach the general investing public
. stock news and events, jargons (vocabulary), stock fundamental;
. obtain profit, cut-loss, technical analysis;
. beware of risk;
. IQ, EQ.

Visit Hebner's book Chapter 3 stock pickers

When the good news come, you do not own that stock. When the bad news arrive, what to do with your stock?
What you should do depends on your risk tolerance and this is the reason why gurus cannot help you sometimes.

Buy-and-sell and make you own decisions.

Good! Excellent! Listen to them and spend you whole life!

Gauß

660ky612 from Hong Kong,

Read

Boo-yah this: 'Lazy Portfolios' beat 'Mad Money' Why waste 15 hours a week and lose a $72,000 'opportunity cost?' By Paul B. Farrell, Nov 6, 2007

8 'Lazy Portfolios' for high-risk 4Q Bear or bull, recession or rebound, 15%-20% returns still look great! By Paul B. Farrell, Sep 10, 2007

"Lazy Persons Guide to Investing, Business Plus, 2006, (336 pages)" by Paul Farrell, J.D. Ph.D Click one of the very many Taylor's heroic services to the States


Gauß

[Schooly D]

Before recommending low-expenses index funds to the general investing public, one must settle the question:
Active management by individual investors is a Loser's Game (stock picking, gurus' advices, market timing, chasing hot-fund manager, market newsletters; magazines; newspapers) all don't work!

Please provide some evidences: articles, references, book excerpts, etc.

As the philosopher said, life can only be understood backwards, but it must be lived forwards. In the absence of any scientific laws of investing, and there aren't any, all we have to go on is the historical return data, which makes a persuasive case for passive indexing. But you are certainly free to conduct your own experiment: place half your assets in one of the lazy portfolios described in the Paul Farrel article, and actively manage the other half. Report back to us in a year on how the experiment turned out.

Good luck!

David

[660ky612]

Please provide some evidences: articles, references, book excerpts, etc.

Have you tried doing a Google search? I'm sure you will find several articles on the debate.

Sometimes a web search is not that appropriate, because it is reinventing the wheel.

Thank you DaveTH, Here is the explanation of my statement of no need to "reinventing the wheel" on Sun Oct 21, 2007 3:04 pm.

Before asking the questions, I have already got
o Larry E. Swedroe, "The only guide to a winning investment strategy you'll ever need" New York, Truman Talley Books/St. Martin's Press, c2005. 1st rev. and updated ed.

Chapter 2 of the book, p.11 to p.53 is, Active Portfolio Management Is a Loser's Game [by individual investors, gurus and fund managers] , which provides a model answer to my questions. Here is the titles of the sub-sections:

Individual Stock Selection
Relying on Past Performance
Chasing the Hot-Fund Manager
Relying on Trade Publications
Money Talks, Investors Walk
The Class of 2001
The Honour Roll
Relying on Market Newsletters
Relying on Rating Services
Relying on the Experts
The Royalty of Portfolio Management
When Even the Best Aren't Likely to Win the Game
Outfoxing the Box
Ignorance Is Bliss
Whose Interest Do they Have At Heart?
That Giant Sucking Sound
The Bear Market Myth
The Competition is Too Tough (short exposition of EMH is here)
Being Smart is not Good Enough
Summary
The Prudent Investor Rule
Filling in the Void

The Notes on p.290-p.292 of the book list the citations of this Chapter 2. There are such fifty nine citations of this one single chapter! Let us reproduce the first four here:

1. Brad Barber and Torrance Odean. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance (April 2000).
2. Brad Barber and Terrancc Odean. "Do Investors Trade Too Much?" American Economic Review (December 1999).
3. Brad Barber and Terrancc Odean, "Boys Will Be Boys: Gender, Overconfidence and Common Stock Investment," Quarterly Journal of Economics (February 2001).
4. Brad Barber and Terrancc Odean, 'Too Many Cooks Spoil the Profit: The Performance of Investment Clubs." Financial Analysis Journal (January/February 2000).

In the academic field, do you know not all publications are counted towards as publications? The Journal of Finance, the Journal of Portfolio Management are top-tier peer-reviewed journals in the field of finance. I don't know much in this field at the present moment.

On Tue Oct 23, 2007 12:56 pm

Did you check the reference library for the active vs passive investing thread?

Here's a link to the research papers by Terrance Odean.
Regards,
Simba

Thank you Simba for providing the links to Professors Barber and Odean's work.

Allow me to draw your attentions to two things:

1) What professors in your home country and my home country do?

2) See [No 1 globally] Come to play WARRANTS at Hong Kong http://www.diehards.org/forum/viewtopic ... highlight=
Investigating the Hong Kong's Warrant Market and comparing it to that of Germany and Italy might be a potentially good topic for Ph.D. research in Financial Engineering, following Professors Barber and Odean's footsteps on investing the market and the performance results of the individual investors.

Thanks,
660ky612 from Hong Kong
email: lulu_fHongKong@yahoo.com

[dratkinson]

660ky612 from Hong Kong

You ask for logical evidence that passive management provides higher returns than active management.

Please provide some evidences: articles, references, book excerpts, etc.

Do this. Search Google for "arithmetic of active management". (Do not use the quote marks.)

You will find the article by Stanford University professor William Sharpe (Nobel laureate, economics), The Arithmetic of Active Management. I believe this article does a good job of answering your question.

Here is a link to that article: http://www.stanford.edu/~wfsharpe/art/active/active.htm

Hope this answers your question.

/r
David

P.S. After you are convinced of the advantages of passive investing, I will want you to help me identify no-load, low-cost, passive investing opportunities in China that I may recommend to my Chinese penpal. I want to help her construct a global passive portfolio.

[grumel]

Burton Malkiel thinks the to foreigners closed part of the chinese market is not efficient and one should buy closed end active funds there. So better be carful with indexing sugestions there.

Search the forum for malkiel and china to (hopefully since the search funciton here is pretty bad ) find a google video link to this statement