bibacula wrote:
Theory is unimportant in the end. Can anyone give real-world returns showing skill in stock picking over time? Or do you just need faith, like a religion?
Here are two I'm familiar with ...
http://www.gurufocus.com/StockBuy.php?G ... th+Klarman
http://finance.yahoo.com/q/pm?s=FPACX+Performance (Steve Romick)
And there's of course Buffett.
All three of them tend to be able to sit on large amounts of cash for extended periods when they think risk outweighs reward. They tend to buy a wide assortment of securities, not just common stocks. In short, they have large freedoms to go wherever for inefficiencies.
You will find that outperformers either close their funds quickly or get hired into private money because of the inherent limitations of managing a sizeable fund due to slippage. This means it's hard/impossible to identify these guys based on just looking at their 1-3-5 year returns---as most people do when they tick off holdings on their 401k plan. You have to read their annual letters to see what they're doing and crucially WHY they're doing it.
The slippage problem is also why the average of mutual/pension funds don't beat the market... because they are the market.
It is also why Buffett can't get the same returns he could were he only to manage a 1M portfolio.
It's also why this is a very strong edge for people not invested in mutual/pension funds. They can buy and sell without moving the market price for practically all stocks... not just MidCap or larger.
WRT statistics, and this is an important point. I once read a book. Unfortunately I forget the title but it was a value investing book. Maybe it was Security Analysis or the Intelligent Investor or someone belonging to the philosophy (there are about 10 classics or so...could have been any). It did in fact mention the coin flipping example. It did however also mention that out of 20 of Graham's (I believe it was Graham but don't quote me on it) students close to all of them went on to gain spectacular returns. Now if you include such small groups in a big random sample of 25 year old MBA/CPA/CFA managers, with little individual insight and echo chamber thought processes, sure it will drown out statistically and you won't see a signal. So you need to add another dimension to the data. You need to use more than just "recent returns" when datamining. In particular, you need to use something that's unquantifiable by simple statistical analysis. Why? Because anyone (401k investors pretty much do it all the time!) is capable of doing such an analysis and those those funds that answer to such an analysis are quickly maxed out resulting in a subsequent crappy performance. It's inevitable by construction.
Now, if you do this, you will be able to find that certain kinds of people do have an edge. In short, as always, you need to provide actually value to the market in order to profit. It's impossible to gain an edge without working for it. Very important!
Unfortunately, this is not something that can be written down in a single paragraph on the internet. It requires reading at least 50 different investment books, as many as possible really, plowing through prospectuses, thinking very deeply about what makes sense. Thinking about the markets. Most people are not willing to go to such lengths. Not even professionals.
It's a little bit like a high school class. Imagine that instead of just doing homework, which you for the sake of the argument has no interest in, you could just copy the average answer and get a guaranteed C-grade. This beats copying a random classmate, because you might copy a D-student. You could also randomly copy an A-student. What makes it trickier is that D-students don't always get Ds and neither do A-students get As. Were you just to sample you friends statistically you might not learn who is really an A student and who is really a D student before graduation. Hence random sampling is insufficient and a poor strategy compared to just indexing the answer. However, if you put in some effort in getting to know your classmates, you get an idea of whose the smarter student and who is not. So now you can copy who you think will be an A student with more confidence than a random z-score, but ONLY because you put in effort. If you put in even more effort, you can even start doing your own problem solving and get your own answers. After all, with enough diligence, you might be an A+ student. In that case, you'll probably want to stop copying.
This analogy holds almost exactly!
However, because the method (of identifying smart friends vs dumb friends or smart managers .. or how to solve investment problems) can't be demonstrated in three easy steps, it's pretty much impossible to convince anyone who disagree. You see the problem here? Like if I told you my current holdings, you'd still have to wait 5 years to figure out if I was right. And if I show my results over the past 5 years (which are 40% better than the market) you'll say I was just lucky. But what if I had really good reasons back then and those turned out right .. would you trust me more? Dunno ... maybe you would/ Maybe you wouldn't.
There really aren't any special "expert secrets" to the methods that obtain those results. They've been known for over 80 years. It's just that putting in all that work and having to disagree with popular sentiment is tough to stomach, so most simply choose not to. I will readily admit that buying into a downbeaten sector sucks when it falls another 20% ... and it may suck for a year or two until it turns around and doubles. In the meantime there's a lot of worry. I really do, occasionally, consider simply switching to market returns just so I don't have to endure the uncertainty anymore. In the groupings I described above, I consider myself a 1 but sometimes a 4. I know and mostly I know that I know, but sometimes there's fear, doubt, uncertainty.
We may never agree on this but maybe we can agree to disagree. Fact is, index investors do their thing and non-index investors do their thing. Consider that the wide-spread belief that market beating is impossible actually makes it easier. If I was less argumentative (I really try to be), I would just shut up and take advantage of it (like I did in 2008/09... and which I think I'm doing now in 2013).
