Black Monday

[SailorRob]

There will most likely be some active funds / hedge funds what have you that beat the benchmark but the question is are they comparing the right benchmark and over what time period. It would be easy to pick and choose and put one's performance in a favourable light. And even then, say, they have outperformed a broadly acceptable index and over a consistent period, how does luck factor into it, particularly w/ respect to future returns.

Not a perfect example but one that stuck with me from school.

Imagine a thousand people compete in a coin flipping contest to see who can get heads consistently the most.

After the first flip, ~500 people would be out.

By the fifth flip, statistically 97% people would be out and 3.13% (50%^5) would have flipped heads 5 times in a row. So a lucky 31 people who appear to be masters in their trade, outperforming the lesser 969 mere mortals. People flock around them to see what it was they did to make it happen. Was it the custom suit they wore, the way they polished their nails before flipping, the good luck charm they wore around their neck, or the way they flicked their thumb that made it so.

5 more flips later - getting to 10 flips in a row - only one person stands tall - flipping 10 heads in a row (50%^10 x 1000). All 999 fell by the wayside. The champion is crowned and all are in awe. Go on - flip one more for good fun - you just did 10 in a row surely the odds are a banger for another heads. After all, they've beaten the odds, and over a long period of time. But in reality the chance of flipping another heads is just 50%.

Point being there are thousands of active mutual funds, hedge funds, and so on globally, and each probably managing a handful or two of products - so a huge number of products, and statistically a good chance at least some will have outperformed the index. But is that just luck or skill? Hard to know, IMO.

Exactly right.

But of a sample size of a million people, if ALL the pro coin tossers wore the exact same custom suit and nail polish then we would know something was up.

Here Warren explains it perfectly and even uses similar argument to you but to prove the opposite. (https://www8.gsb.columbia.edu/sites/...uffett1984.pdf)

What you say is true but you need to know and be able to filter it out.

The only benchmark that matters is the S&P500 for equities or if you are a weakling you can use some MCSI global rubbish or NZ crap. Time frame has to be well over a full cycle, 15 years minimum and preferably 20 or 30 years. But a massive outperformance over 13 or so years is also valid like Buffett partnership.

What you point out with different products is very valid as well. If you manage more than one then get off the Grass. Like Dartr having many different 'stratagies' and telling us about the one that's done 15% for 8 years... Well bro what about the others.

[Muse]

Exactly right.

But of a sample size of a million people, if ALL the pro coin tossers wore the exact same custom suit and nail polish then we would know something was up.

Here Warren explains it perfectly and even uses similar argument to you but to prove the opposite. (https://www8.gsb.columbia.edu/sites/...uffett1984.pdf)

What you say is true but you need to know and be able to filter it out.

The only benchmark that matters is the S&P500 for equities or if you are a weakling you can use some MCSI global rubbish or NZ crap. Time frame has to be well over a full cycle, 15 years minimum and preferably 20 or 30 years. But a massive outperformance over 13 or so years is also valid like Buffett partnership.

What you point out with different products is very valid as well. If you manage more than one then get off the Grass. Like Dartr having many different 'stratagies' and telling us about the one that's done 15% for 8 years... Well bro what about the others.

Thanks I'll have a read of the article.

I wasn't ruling out the possibility that a select few who outperform the index do so out of skill, just highlighting the statistical scale that luck plays into it for the many that do.

And as you say - given a large enough sample set of those who did / flipped heads x # of times - the goal is to see what common tools where employed by those who outperformed the index.

You obviously spend a lot of time doing that in your own right, and sadly there is a whole industry of people who do it professionally. "Fund of funds" - professionals who raise capital from investors promising they are experts at finding fund managers who can consistently achieve outperformance - and investing said funds into them. And they often times do find find those good managers, but by the time they've had their cut the net returns back to their investors are below benchmark.

Back to the beginning premise - I think cohorts matter. A fund that launches in a period of turmoil - say post GFC or months following the covid outbreak - with a unique strategy (say going hard on crypto or on respiratory devices before closing out soon, for instance) are often able to achieve returns that are very high in an absolute sense (and impress a lot of people who don't benchmark), and then also beat the S&P500 over the long term. But are they repeatable - that's the question. So yeah a 10-20 window is obviously one you have to consider, but to filter out that luck / non repeatable performance possibility, you need to consider how did it go (relative to the benchmark) in the last 1, 2, 3, 4, 5 years - not just from inception. Because those defining early moments - which could be blind luck or non repeatable - can also set up and crystalize its long term performance above benchmark even if its last few years have been below par and possibly set to continue. But for those that outperform over the long term - AND also in a reasonable proportion of recent years - its worth considering if they have something more than just luck.

Probably should have read your article first before responding but will put it on my holiday reading list.

[SailorRob]

Thanks I'll have a read of the article.

I wasn't ruling out the possibility that a select few who outperform the index do so out of skill, just highlighting the statistical scale that luck plays into it for the many that do.

And as you say - given a large enough sample set of those who did / flipped heads x # of times - the goal is to see what common tools where employed by those who outperformed the index.

You obviously spend a lot of time doing that in your own right, and sadly there is a whole industry of people who do it professionally. "Fund of funds" - professionals who raise capital from investors promising they are experts at finding fund managers who can consistently achieve outperformance - and investing said funds into them. And they often times do find find those good managers, but by the time they've had their cut the net returns back to their investors are below benchmark.

Back to the beginning premise - I think cohorts matter. A fund that launches in a period of turmoil - say post GFC or months following the covid outbreak - with a unique strategy (say going hard on crypto or on respiratory devices before closing out soon, for instance) are often able to achieve returns that are very high in an absolute sense (and impress a lot of people who don't benchmark), and then also beat the S&P500 over the long term. But are they repeatable - that's the question. So yeah a 10-20 window is obviously one you have to consider, but to filter out that luck / non repeatable performance possibility, you need to consider how did it go (relative to the benchmark) in the last 1, 2, 3, 4, 5 years - not just from inception. Because those defining early moments - which could be blind luck or non repeatable - can also set up and crystalize its long term performance above benchmark even if its last few years have been below par and possibly set to continue. But for those that outperform over the long term - AND also in a reasonable proportion of recent years - its worth considering if they have something more than just luck.

Probably should have read your article first before responding but will put it on my holiday reading list.

An exceptional post. You will enjoy the Buffett article immensely, please post or PM after you have read it. You have a level of understanding of this topic that very few do.

Regarding the 'fund of funds' if you are not already aware, you should investigate Buffetts bet for charity against this exact set up - really worth studying.

The other thing with what you mention with high performing managers being sought out by 'funds of funds', by the time they get the extra money to manage their original strategy often doesn't work with the larger capital base. Munger in his very last podcast pontificated about this, saying that they should be measured on their dollar returns as they have outstanding performance in the early days with little capital and then when they have lots of money they lose it but still have an incredible record, where net they actually lost money overall.

Also I'd like to mention the opposite effect of the one you highlighted, those such as Einhorn who have underperformed the recent bull market dramatically as have many great investors who have still got incredible 25 and 30 year records. So you could easily underperform for 8 years or more and also be one of the worlds greatest investors.

All this said, I don't think it will be too difficult to outperform the S&P500 over the next decade as the market has become so bifurcated and the multiples on the index are double what you can easily construct a decent portfolio of companies with EPS growth higher than the index. For example Berkshire trades for 13 x earnings and retains 100% at a return of 10-12% and is very sustainable, accounting is honest and virtually no write downs. So EPS is growing far faster than the index and starting multiple is far lower. Mathematically it's hard to see how the index could outperform unless the PE went absolutely sky high.

Yes I spend a huge amount of time working out who is actually worth following and taking into account everything you have highlighted and also making sure I understand how they have achieved their returns, I then shamelessly use these people for idea generation.

Here is one I am currently investigating - 20% after fees CAGR for 25 years! https://www.turtlecreek.ca/our-returns/ and more amazing still is in 2011 they had a 13 year record of 24% CAGR against ZERO for the market (SP500 in Canadian $).

13 years of 24% CAGR vs ZERO is something else, and then to continue it over the following bull market...

[winner69]

Big afternoon tumble on SPX last night

Suppose profit taking before Xmas break for big guys

[alokdhir]

Big afternoon tumble on SPX last night

Suppose profit taking before Xmas break for big guys

More like giving chance to left out people to join in ...most of the pundits were negative equity for year 2023 ...now they dont know what HIT them ...Only one funny Indian Professor of some Uni and Lee were the Bullish on CNBC since the start of the year ...both had around 4600 target ...which is very nicely met ...but when they said that in early 2023 ...all used to laugh ...guess who is laughing now ...one who said rates super higher for super longer and deep recessions etc ...maybe that or less then expected growth will come in 2024 ...who knows ...but try to stay contrarian on a big market like USA can work wonders if u turn out to be right ...All know market rewards few and takes from most ...talking about trading not investing here

[alokdhir]

Any guesses for stocks coming out as Broker's Picks this weekend ? MFT ?? SUM ??

[Ferg]

Thanks for the link to the Buffett article SailorRob. Good refresher reading.

For those looking to calculate inflation adjusted values, this is a handy online calculator:
https://www.inflationtool.com/new-ze...equency=yearly

And this tool helps with calculating S&P returns over whatever time period you want:
https://ofdollarsanddata.com/sp500-calculator/

[SailorRob]

Thanks for the link to the Buffett article SailorRob. Good refresher reading.

For those looking to calculate inflation adjusted values, this is a handy online calculator:
https://www.inflationtool.com/new-ze...equency=yearly

And this tool helps with calculating S&P returns over whatever time period you want:
https://ofdollarsanddata.com/sp500-calculator/

Excellent resources, suggest everyone spends some time playing with each.

Quite funny looking at the inflation chart that so much time is spent panicking about deflation! Orr in 2019 was telling the banks to prepare their systems for negative rates remember.

A few minutes with the S&P500 calculator will soon reveal that Bull sating that there has only been one time in the last 100 years that it paid to be invested in the index is extremely laughable (surprise surprise).

[bull....]

Excellent resources, suggest everyone spends some time playing with each.

Quite funny looking at the inflation chart that so much time is spent panicking about deflation! Orr in 2019 was telling the banks to prepare their systems for negative rates remember.

A few minutes with the S&P500 calculator will soon reveal that Bull sating that there has only been one time in the last 100 years that it paid to be invested in the index is extremely laughable (surprise surprise).

bending the truth again. its when you start and finish and any neg yrs in the mix thats makes the difference.
the fund managers you keep parroting on about are not special they invested in the period in the last 20 odd yrs where just about any monkey could have done well.

you need to get back to discovering buffett secret sauce. ill give you a clue cause you are having a bit of a problem discovering it.
As ben graham once said that in investing it is not necessary to do extraordinary things to get extraordinary results.

[alokdhir]

https://www.rnz.co.nz/news/business/...es-too-cheaply

Why we need get warning ? Do we not value them properly ...maybe lack of liquidity of NZX is creating undervalued companies ...

KFL which hold NZ's top blue chips like MFT / FPH / IFT / SUM / AIA is trading at almost 10% discount to its recent NAV ...that too at a time when rates path is about to reverse if not yet reversed in some people's mind ...amazing ....also how I wish I had more cash to cash on this opportunity