Gyroscopic Investing

While I'm a committed indexer, the claims in the article seem a little dubious.  For what it's worth when I run the identical "First Screen Criteria" on Morningstar's fund screener, it shows 1,167 funds that pass the screen.

cnh wrote: While I'm a committed indexer, the claims in the article seem a little dubious.  For what it's worth when I run the identical "First Screen Criteria" on Morningstar's fund screener, it shows 1,167 funds that pass the screen.

And if I constrain it appropriately to the Large Blend category, comparing "apples to apples," 229 funds still pass the screen.  SEQUX, for example.

cnh wrote: While I'm a committed indexer, the claims in the article seem a little dubious.  For what it's worth when I run the identical "First Screen Criteria" on Morningstar's fund screener, it shows 1,167 funds that pass the screen.

Yeah, there seems to be a glitch in the Yahoo! fund screener.  I used the criteria in the article, and I indeed got 5 funds in return.  But then I noticed that 3 of the 5 funds have a manager tenure of less than 5 years, yet I screened for funds with a manager tenure of 5+ years.

The results of this study roughly correspond to what I have read in similar studies. There may be slight variations here and there. But the bottom line is that the percentage of actively managed funds that outperform the S&P 500 over ten years is going to be less than 1%, probably much less.



Not a big fan of Zero Hedge, but they nailed this one. It must be a quarter past 6.

Still...offering dubious evidence undermines the argument.  I think Ferri took a more sophisticated and perhaps legitimate look at the issue and more convincingly demonstrated the limits of active management, which grow greater over extended periods.

Operative words: active management by Wall Street.  Anyone with half a brain can do better themselves so long as they're not lemmings.

MachineGhost wrote: Operative words: active management by Wall Street.  Anyone with half a brain can do better themselves so long as they're not lemmings.

I strongly disagree. People who think they are smarter than guys who spend their entire careers studying stocks and markets (most of whom index their own retirement money), and who have all of the resources available that most private investors can only dream of are kidding themselves. And then there is the simple math. The number of people who can outperform the market is going to be mathematically limited by the law of averages.  Beating the market over the long run is not impossible. But the odds are massively stacked against you. There so many variables you neither predict nor control. Trying to beat the market is not quite as bad as buying a lottery ticket as you probably will get some positive return over time. But the math combined with the luck required is just so daunting.

If someone really wants to try though I would probably follow Mark Cuban's otherwise really horrible advice and make one or two highly concentrated bets in something very speculative, and then hang on and pray. Some people have made insane money doing that. Not many, but a few.

I think MG's point (or part of it anyway) is that Wall Street is hindered by the sheer size of the funds they're investing.  Making changes to a mutual fund or ETF is like trying to turn a battleship around: you can do it, but it takes some coordinated effort and time.  Muppets can at least move nimbly, assuming there's liquidity in their holdings. 

rocketdog wrote: I think MG's point (or part of it anyway) is that Wall Street is hindered by the sheer size of the funds they're investing.  Making changes to a mutual fund or ETF is like trying to turn a battleship around: you can do it, but it takes some coordinated effort and time.  Muppets can at least move nimbly, assuming there's liquidity in their holdings.

Fair point. Small private investors have eliminated some of the constraints like the 1-2% skim off the top and the limitations of large funds. But the math is still heavily against you.

rocketdog wrote: I think MG's point (or part of it anyway) is that Wall Street is hindered by the sheer size of the funds they're investing.  Making changes to a mutual fund or ETF is like trying to turn a battleship around: you can do it, but it takes some coordinated effort and time.  Muppets can at least move nimbly, assuming there's liquidity in their holdings.

Its much, much more comprehensive than that.  The huge problem is the noise of groupthink that is involved with being on Wall Street.  Everyone reads The Wall Street Journal on the train in the morning to work, all eat lunch at the same high falutin' places, all gossip the same social circle psychodrama, all have the same cozy kick back buy-sell side institutional schemes, etc..  It's very social orientated rather than quantitative.  It's all an open secret where everyone reluctantly acknowledges when cornered that Wall Street can't really deliver, but their job and income is dependent on selling the fiction, so what point is there in rocking the boat when the smart answer would have been not to go into the industry in the first place?  No different in concept than hoodwinking young, naive men with replete tales of heoric worship so they will join the military and get murdered or dismembered.  Perceptions vs reality.

Once you avoid or throw off all of these constraints, then and only then can you outperform these Wall Street drones that make up 80% of the "market average".  Bogle and his groupies have been good at dispelling the perceptions, but they're woefully ignorant of the realities of how to outperform.  First you must believe, then and only then will you see the answers....

Ad Orientem wrote: Fair point. Small private investors have eliminated some of the constraints like the 1-2% skim off the top and the limitations of large funds. But the math is still heavily against you.

It's not "math" that is heavily against.

It is odds or probability.  Or is that what you meant?


However, the odds under discussion don't apply.  Those odds assume as a fundamental part of their calculation that everybody will be doing essentially the same thing as each other, and doing tomorrow as they did yesterday, because their goals and objectives are always the same.  Which if you are doing the same thing, but have higher expenses or play slower than the others then of course you are not going to beat.  Hence the long odds.  But the conclusions all assume a priori the data fits the curve, so it is hardly surprising that the answer fits the assumption.

An individual investor who invests in something in addition to or instead of the one true index is by definition not doing the same thing.  It's like trying to compare batting averages between top players in baseball, basketball and football.  Yes they are all trying to get the high score, but man, those football players have really bad batting averages!

What investor has 100% of their portfolio in the S&P 500 index?  Or even the entire U.S. market or entire world market index?  Already we see that everyone is trying to meet some different objective than simply to match "the index."  Are we trying to beat the index?  Maybe some are.  What does "beat the index" even mean?  Do you slice and dice your portfolio with more than one index fund?  If so, you are trying to beat or improve upon some characteristic of "the index."  Did you succeed?  Not by that article, unless by the one criteria of total net return your portfolio was greater than "the index."  (Which index?)


It is trivially easy to beat "the index."  Just let me pick the criteria, and I'll beat it 9/10 of the time with some part of my portfolio.  Part you say?  Of course.  These articles assume only part of the portfolio, because nobody expects anyone to invest 100% of their assets in "the index" no matter how perfect "the index" is in every respect.


But wait, I'm an individual investor.  That means I always get to pick my own criteria.  Score!


My bottom line, is please keep encouraging people to index, to think of and treat the market as a uniform blob.  The more people index, the more the opportunities open for those who are willing to look at an individual company as an individual.  Companies are not the same no matter how you try to aggregate them.  And neither are people and their objectives.  Which is why I always laugh at people who try to justify their religious faith in indexing by using math.

AgAuMoney wrote:

Ad Orientem wrote: Fair point. Small private investors have eliminated some of the constraints like the 1-2% skim off the top and the limitations of large funds. But the math is still heavily against you.

It's not "math" that is heavily against.

It is odds or probability.  Or is that what you meant?

That's what I meant. Whether you are a multi-billion dollar Wall Street hedge fund or Joe the Main Street barber, in order to beat the index, someone else has to fall short. If 50 is the average you can't have 60% above that unless a lot people are badly failing to meet the average. Yes, people can do it. But over the long run there are so many obstacles that very few people come out ahead of the index.

Wall Street is the world's biggest casino. And just like in Vegas the house has the odds stacked in its favor. The only way to be sure you are going to beat the house is to cheat. And indexing is the only legal means I am aware of for cheating on the Street. If your ER is at rock bottom and you are reinvesting your dividends you are guaranteed to beat the index each and every year. I will take that over trying to be one of the less than 1%.

Not saying no one should ever speculate. But Harry Browne was right when he warned that you should only do that with money you can afford to lose.

In all my research, the only active stock-picking strategy that seems worth trying is dividend growth investing. Trying to beat the index at its own game is an exercise in luck since the deck is stacked against you as an individual. With dividend growth investing, there are opportunities for the individual investor since you're really not trying to beat an index; you're trying to provide a growing revenue stream, and to my knowledge, there's no index that tracks this. So even if your stocks fall in capital value, comparing that to an index might make your performance look terrible, but if you see that as an opportunity to buy more stocks when they're cheap, it could really boost your dividend income.

Of course, it's very risky too since companies can reduce or eliminate their dividends at any time. And of course they can also go out of business too. 

Ad Orientem wrote: That's what I meant. Whether you are a multi-billion dollar Wall Street hedge fund or Joe the Main Street barber, in order to beat the index, someone else has to fall short. If 50 is the average you can't have 60% above that unless a lot people are badly failing to meet the average. Yes, people can do it. But over the long run there are so many obstacles that very few people come out ahead of the index.

Non-indexing isn't a zero-gum game as you imply.  Consider who is profiting from all the active funds that fall short of the indexes they track, or of the passive investors in market indexes that fall short of superior active or passive methods?    It sure isn't Wall Street as Wall Street is just as conduit.

An average is only in the rough middle or median of the pack.  Indexing is nothing but a fail safe mechanism to do no worse than the average.  It is not superiority by default and projecting one's averageness onto others as justification for only striving for an average reeks of cognitive dissonance.  I suspect that if average investors had to come to terms with that they are being exploited by above average investors despite all the Boglehand rah-rah circle jerk propaganda to justify their false above averageness, they would become increasingly uncomfortable.  And that is why they justify the propaganda like a cult member.

Pointedstick wrote: Of course, it's very risky too since companies can reduce or eliminate their dividends at any time. And of course they can also go out of business too. 

Need I remind you the S&P 500 dropped 50% on two separation occasions in the past 10 years?  At what point do you Boglehead groupies wake up and realize that only being average leaves a underperformance gap a few miles long?

Its easy to beat an index (for now).  Just don't be socially influenced or employed by Wall Street.  And stop believing everything you hear from devoted members of certain cults, including this one.  If you can't manage your emotions or you're a typical human loser and not Mr. Spock, then fine, be average, but stop bitchin' about how its improbable for anyone to do any better as a rationalization.

MachineGhost wrote: I suspect that if average investors had to come to terms with that they are being exploited by above average investors despite all the Boglehand rah-rah circle jerk propaganda to justify their false above averageness, they would become increasingly uncomfortable.  And that is why they justify the propaganda like a cult member.

LOL at Boglehand. You already said circle jerk. We get it, we get it.

Need I remind you the S&P 500 dropped 50% on two separation occasions in the past 10 years?

Wish I had been in the pp then. Those would have been good rebalancing points. Well, they were good rebalance points for bogleheads, too, who were able to rebalance out of bonds and into more stocks.

Well to be fair, being an above-average investor is ridiculously difficult for 99.9% of people. There are above average poker players too… but most of us are never going to make money playing poker.

Of course it's possible… but unless you have a lot of time to devote to becoming a finance nerd and you live and breathe data, it's probably a better use of your time to focus on things you have more control over, like your career, or starting a side business or something. There's a lot to be said for being content with average on autopilot.

Actually I think indexing is far from average. If (an important qualifier) you are reinvesting your dividends and you keep the ER at rock bottom and avoid unnecessary rebalancing and the taxes that come with that, you are guaranteed to beat the index each and every year. That also means beating the vast majority of private investors and all but a microscopic percentage of the Wall Street hucksters.  And the law of compound interest suggest that over the long term the margin by which you will beat the index will grow, whereas for all but a very few active investors, the margins by which they fall short will also continue to grow.

Math can be both inconvenient and cruel.

Ad Orientem wrote: Actually I think indexing is far from average. If (an important qualifier) you are reinvesting your dividends and you keep the ER at rock bottom and avoid unnecessary rebalancing and the taxes that come with that, you are guaranteed to beat the index each and every year. That also means beating the vast majority of private investors and all but a microscopic percentage of the Wall Street hucksters.  And the law of compound interest suggest that over the long term the margin by which you will beat the index will grow, whereas for all but a very few active investors, the margins by which they fall short will also continue to grow.

Math can be both inconvenient and cruel.

Isn't that assuming that the active stock pickers aren't also reinvesting their dividends? Right now VTI is yielding a hair under 2%; you can find many, many solid companies with a 3% or higher dividend, which will handily beat that reinvested 2%. If you do this in a tax-sheltered account, you can avoid the tax consequences too. Still no avoiding commission fees, of course. But on the other hand, you're avoiding the fund's ER--although VTI's ER is 0.05% which is almost microscopically small.

Not disagreeing with you though, and I have all stock indices myself.

Pointedstick wrote: Well to be fair, being an above-average investor is ridiculously difficult for 99.9% of people. There are above average poker players too… but most of us are never going to make money playing poker.

90%.  100% fail, but its those with the perserverance and stamina to stick with it that become the above average 10%.  So actually you're saying 90% of people are lazy bums, but I knew that already.  It just didn't occur to me that this forum would be full of lazy bums...

Of course it's possible… but unless you have a lot of time to devote to becoming a finance nerd and you live and breathe data, it's probably a better use of your time to focus on things you have more control over, like your career, or starting a side business or something. There's a lot to be said for being content with average on autopilot.

Fair enough.  But as a counterpoint, there's a lot of ETF's now that will give you the advantage without you having to do the work.  And if you did pick stocks yourself, how hard is it to make a dividend grower stock purchase once a week or once a month?  Just doing it infrequently has built-in discipline over hover husbanding.

Ad Orientem wrote: Actually I think indexing is far from average. If (an important qualifier) you are reinvesting your dividends and you keep the ER at rock bottom and avoid unnecessary rebalancing and the taxes that come with that, you are guaranteed to beat the index each and every year. That also means beating the vast majority of private investors and all but a microscopic percentage of the Wall Street hucksters.  And the law of compound interest suggest that over the long term the margin by which you will beat the index will grow, whereas for all but a very few active investors, the margins by which they fall short will also continue to grow.

Not quite.  You will always fall short of any reference index due to fees by default.  The only way you can beat a reference index is by specifically not trying to match it.  This is easy to do when the reference indexes are market-cap weighted which are inferior weighting schemes compared to alternative approaches.  Wall Street is not setup that way, though.  But individual investors have the freedom and there are now plenty of ETF's that give you the ability as well (for lazy bums).

Its easy to beat an index (for now).
…
but its those with the perserverance and stamina to stick with it that become the above average 10%

MG, many of your comments invite the question,
Are you personally beating the market? Year after year? I do see that "for now" at the end, which suggests that it may be temporary, but that seems to contradict perseverance or stamina as the essential market-beating ingredient as opposed to a superior intellect.

Perhaps higher intelligence is more associated with shorter term trading and stock picking, while
stamina is related to dividend investors.
Are you a dividend investor or a seeking alpha type?
Do you run a permanent portfolio at all?

Just curious, because obviously bogleheads are not the only investors who subscribe to the idea that indexing is a wise path to take. PP'ers are no different, even those of us with plenty of time on our hands that could be spent investing differently.

dualstow wrote: Are you personally beating the market? Year after year? I do see that "for now" at the end, which suggests that it may be temporary, but that seems to contradict perseverance or stamina as the essential market-beating ingredient as opposed to a superior intellect.

I don't want to mislead anyone that I've been "active management" in the way I'm advocating.  I am in the process of implementing that approach and fleshing out the theoretical justifications.  Barring any future surprises, it is full speed ahead.  But, there are a lot of issues to consider to make sure it really is worth the time in real-world implementation.  Because academic sources can be so biased or slanted, I don't trust anything unless I can first prove it myself.

Perhaps higher intelligence is more associated with shorter term trading and stock picking, while
stamina is related to dividend investors.
Are you a dividend investor or a seeking alpha type?
Do you run a permanent portfolio at all?

Maybe, but perserverance and discipline is required for any kind of success, not intelligence.  Of course I run a PP!  I just found it to very risk inefficient after implementation, hence the ultimate fork into "above average" investing techniques.  It really wasn't the plan, but now that Pandora's Box is open, I can't shut it again.

I haven't made a decision on dividend growth investing.  It's quite a fad right now and that bothers me.  I feel it'll come down to whether or not factor tilting with ETF's earns relatively more or less.  ETF's will always have an edge because they are less work and less maintenance, usually at cost of lower returns from over-diversification.  If there was an ETF that did dividend growth investing properly, the issue would be academic.  I can't see a reason not to do it, but it'll have to prove its mettle compared to the alternatives before I'm 100% convinced.  I'm focused on other issues at the moment.

Heck, this whole debate would be a lot easier to settle if one just viewed it in a 100% stock context.  But making any changes within the complex PP context has to be carefully measured and justified.

Just curious, because obviously bogleheads are not the only investors who subscribe to the idea that indexing is a wise path to take. PP'ers are no different, even those of us with plenty of time on our hands that could be spent investing differently.

I don't disagree that indexing is a wise path to take compared to investing by the seat of your pants.  I disagree with settling for being just average with the storms that are coming.  Thats what I feel a lot of people are doing, especially those with the time to be above average.  But maybe I'm projecting too much...

BTW, LOL at the Boglehand!  I'm leaving it unedited for posterity.

MachineGhost wrote: Maybe, but perserverance and discipline is required for any kind of success, not intelligence.  Of course I run a PP!  I just found it to very risk inefficient after implementation, hence the ultimate fork into "above average" investing techniques.  It really wasn't the plan, but now that Pandora's Box is open, I can't shut it again.

If you like the basic PP framework but find it to be risk-inefficient, perhaps you could search for assets that do the same thing but have better-matched volatility? Like what I was indicating in the "more volatile PP" thread, but in reverse. You could have cash, a low-volatility stock index, 10-year Treasuries, and maybe a 30/70 split (just a random guess) of TIPS and gold for your inflation component.

Or you could just play it simple and go with like 55% cash and 15% each of the other assets. As you've pointed out elsewhere, cash has crushed bonds for long periods of time. Of course then you run the risk of turning out like notsheigetz's parents at a time like this if you damn the torpedoes and stay the course.