Less Stupid Investing
>> “If you want to become less stupid at investing, one of the best things to do is surround yourself with people who disagree with you….”.
Well, jeez, within limits. See below.
>> goal to diminish investment innumeracy, especially in the statistical domain.
oh, hear, hear!
>> People think they go to conferences to learn something, but most often they go to have their beliefs confirmed and reinforced by others.” Unfortunately, I suspect more than a few MFO members populate and interact on this fine website for the same dubious purpose. To steal a famous Charles Ellis quote and book title, that’s a “loser’s game”. That’s a primary contributor as to why individual investors consistently don’t realize marketlike returns.
I dunno; I think it's chiefly cuz they don't stick with their plan ('investor returns'), and research bears this out. In other words the kind of people who have stuck with it over the years do not poke around the web and do not post here or anywhere. They enjoy life and do not obsess over investments. We are a forum it seems of aggressive changers and surely frequent traders in some percentage or other. How many times do you read here 'I am going to give it another few months ...' and 'I am thinking of swapping X for Y' and the like?
>> There is a common human tendency to summarily reject new data or new findings that contradict a previously established position. In the academic community, this tendency has a name; it’s called the “Semmelweis Reflex”. In the end, this Reflex erodes investment performance.
This is an extremely hot new journalism meme for sure, without question, esp in politics and finance. Knowing a fair amount about psychology, I call bullshit on it in a great many instances. Confirmation bias, please. I and most others do need to immerse ourselves in creationism, climate-change denial, audio tweakism, supply-side / constant government-denigrating rightwingism, gold advocacy or any other contrary views just to, what, realign or make a good dent in our friggin bias?
If you had been in smallcaps since say 1980 despite the warnings and conference talks about how they were going to something or other, you would have done well. If you had been in largecaps, the same, ignoring those who disagreed and told you to go to smallcaps, you woulda done fine. Indeed if you had stuck with high-yield, or invest-grade bond, or growth, SP500, value, or balanced --- any one of those and only that --- you woulda done just fine.
If you are looking for certainty before 1980, well, sticktoitiveness is no worse than anything else.
>> I suppose one of the lessons from this body of research is that we should all seek and be tolerant of divergent market perspectives and investment opportunities. I believe most MFO participants are in this cohort.
depends
>> Recent academic studies once again conclude that about 75% of active fund managers have long term performance records that roughly hover near the zero Alpha benchmark. Of the residual 25%, about 24% produce negative Alpha. That means that only 1% generate measurable positive Alpha over an extended timeframe. That’s the sad odds when establishing an actively managed portfolio.
Right, concur, roger --- except when it is not. They say, oh how they say, how they repeat, how they admonish, that past performance does not etc etc etc.
Jeez, then what good IS it?
If you had picked long ago (35y) a category above, within a fund family, much less a given manager or group, that was highly regarded back then by some metric or other, guess what? You woulda done fine. That's what my backtesting shows me, cuz I did it --- or failed to. I chased outperformance, stupidly. From 1982 reading I coulda stuck with Fulkerson (CENSX), Fidelity Trend (my father), Janus, much less LOMMX, PENNX, DODBX, Contrafund .... but I woulda second-guessed when they slumped or changed managers or whatever, and woulda bailed. I am positive that this is what most do.
If the triumph of passive investing is that people stick with it, then that's a real and indeed revolutionary triumph. It is NOT a reason not to actively invest or seek superior managers. SPX performance is the least of all of those above, btw. So, I say, make a few seemingly sound decisions based on past performance (go ahead) and leave it the hell alone for a decade.
Easy to preach about this.
I don't know where to turn to find disagreeing viewpoints that are worth spit. I guess that sounds awfully vain. But I am kind of tired of hearing about confirmation bias and its ills, for anyone who is the least bit self-skeptical, investigative but not OCD about it, and tries to monitor his or her own prejudices.
Less Stupid Investing Hi Old Joe and rjb112,
Thank you guys for your pity observations.
It doesn’t get too much older then this, but Publilius Syrus in the 1st century BC said: “It is a bad plan that admits of no modifications”. That ancient wisdom applies today and everyday, especially in spades, for investment matters. All investment decisions, both bad and good, are transient and require constant monitoring and hopefully infrequent changes.
I took the mutual fund Alpha performance data from a 2010 report that I failed to reference. Sorry about that. The title of the study is “False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas”. The three authors are Barras, Scaillet, and Wermers. For completeness, here is a Link to that study:
http://www.rhsmith.umd.edu/faculty/rwermers/FDR_published.pdfThe paper is rather dense. I only reviewed the Introduction and Conclusions sections.
For brevity in my initial post, I omitted some other findings and observations by these researchers that might interest you. For example, the authors discovered that the overall positive Alphas generated by active fund managers have significantly eroded over time. They report that positive Alpha funds have decreased from a roughly 1
5% level to the present 1% level in the last 20 years.
Are fund managers getting dumber? My answer is NO. My interpretation is that active fund managers have proliferated and the field had gotten stronger with increased competition that lowers opportunities to outperform.
Another intriguing aspect of the study is the rather long-term survival of the underperforming funds. The authors included the following statement in their Conclusions section: “Still, it is puzzling why investors seem to increasingly tolerate the existence of a large minority of funds that produce negative alphas, when an increasing array of passively managed funds have become available (such as ETFs).”
I suppose, many of us are slow learners and/or are reluctant to omit a mistake. Another dimension to this misguided loyalty is that we often fail to make relevant benchmark comparisons. I attribute this failure, at least partially, to our limited understanding and trust in statistics.
As Zig Ziglar said:” The first step in solving a problem is to recognize that it does exist”. I believe successful investing requires testing outcomes against some pertinent (designed for your specific purposes) benchmark standard. I suspect that some (perhaps most) individual investors don’t do this simple task to their end financial detriment.
Thanks again guys for keeping this discussion fresh.
Best Wishes.
Less Stupid Investing Hi Guys,
Well I’ll risk jumping from the frying pan into the fire with this reference, but it does address a serious shortcoming in many investor's behavior.
I’m referring to a recent Motley Fool article cobbled together by Morgan Housel titled “How to Get Less Stupid at Investing”. The article touts the benefits of seeking a divergent set of market opinions, especially those that directly conflict with your special preferences and biases. Here is the Link:
http://www.fool.com/investing/general/2014/07/08/how-to-get-less-stupid-at-investing.aspx?source=iaasitlnk0000003Housel’s bottom-line observation is: “If you want to become less stupid at investing, one of the best things to do is surround yourself with people who disagree with you….”.
That’s one of two primary reasons why I have been a constant visitor and occasional contributor to MFO. My other reason harbors a goal to diminish investment innumeracy, especially in the statistical domain. Individual investors better understand and appreciate that historically, equities offer a 7 out of 10 likelihood of positive annual returns over quoting the same statistic as a 70% probability. That’s surprising, but is true.
Near the end of the article, Housel formulates a Law: “This made me realize the First Law of Financial Conferences: People think they go to conferences to learn something, but most often they go to have their beliefs confirmed and reinforced by others.”
Unfortunately, I suspect more than a few MFO members populate and interact on this fine website for the same dubious purpose. To steal a famous Charles Ellis quote and book title, that’s a “loser’s game”. That’s a primary contributor as to why individual investors consistently don’t realize market-like returns.
There is a common human tendency to summarily reject new data or new findings that contradict a previously established position. In the academic community, this tendency has a name; it’s called the “Semmelweis Reflex”. In the end, this Reflex erodes investment performance.
I suppose one of the lessons from this body of research is that we should all seek and be tolerant of divergent market perspectives and investment opportunities. I believe most MFO participants are in this cohort.
So, permit me to conclude with yet another frying pan exposure which will test your active fund manager appetite.
Recent academic studies once again conclude that about 7
5% of active fund managers have long term performance records that roughly hover near the zero Alpha benchmark. Of the residual 2
5%, about 24% produce negative Alpha. That means that only 1% generate measurable positive Alpha over an extended timeframe. That’s the sad odds when establishing an actively managed portfolio.
Good luck to all you guys who pursue the active strategy, and I really mean it. Most importantly, I want everyone to succeed. Almost equally importantly, it is the pursuit of active management that keeps the market pricing discovery mechanism functioning well. Thank you for accepting that necessary and costly task. In a sense, the passive Index fund investor is indeed getting a free lunch.
Best Regards.
