Investing General Discussion

That being said, their proof isn't what I would have been doing, and I'll try to find the time this week to change the R code a little bit to actually compare a few indexes with random picks, because a lot of the ETF they're using are a bit too exotic to be pertinent, so the sample of ETFs has to be changed.

LachiusTZ said:

My retirement fund is small too

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That's a cultural thing I guess, I don't feel more confortable posting a pic of my dick than one of my savings or my paycheck. It's kinda taboo in France.

Posting a pic of an ugly guy dating a supermodel isn't going to prove that ugly guys usually date supermodels anyway.

I don't even understand why that would be even remotely relevant to discussing a strategy. If you want to study the efficiency of a random strategy you obviously need to consider a fairly large sample to at the very least estimate the variance.

What I find a bit odd, is that I can't find much scientific paper on it, except the one I linked previously, which isn't bad, but definitely not closing the topic. Does random picking stocks outperform index trading, my guess is on average it's about the same, but the real question is on the variance. I think it's an increasingly important question as :

The more people use ETF, the worse they get seems a very reasonable assumption, and researches point to it. To me it seems obvious, as if large part of investors are using the same portfolio, it means the assets weighted heavily in said portolio are going to be traded a lot, resulting in an increase of volatility on said stocks, i.e. the risk.

I think one reason that beating indexes is hard, is precisely because it's sorta random. I mean, the way companies are weighted in the index isn't even consistant, nor the way the companies are selected into the indexes. And yet, regardless of the way the index is made, it's hard to beat.

So your position has changed from "I know I'm right" to "Well, interestingly now that I've looked into I can't find any evidence to support my opinions"

People don't trade ETF/Index funds a lot. They sit on them. They let the market play over the long term without worrying if they lost a few cents by not waking up 3 hours early to check the pre-market reports.

What "researches" point to index funds being losers? Or them being tied to "oversaturation"?

Investing in individual stocks is all smoke and mirrors bud. You may as well go down to the track and bet on horses with your dumb ass "investing" strategy. There are very few people in this world who have the knowledge to invest smart. And they usually get that knowledge by being in the right circles and by being close to the people who write the financial reports.

Khane said:

So your position has changed from "I know I'm right" to "Well, interestingly now that I've looked into I can't find any evidence to support my opinions"

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I've posted half a dozen article on the topic, that all points at my claims not being outlandish. You've just been screaming "you can't be right" with no argument, but yeah I'm starting to get why this thread isn"t getting much action, it's just to compare the relative size of dicks. All I said was what triggered my will to discuss this, was that after about 8 years of investing directly into stocks I noticed it followed, and even lately beat a little bit the index, it's completely anecdotical anyway, and wouldn't prove anything either way, and yet THAT is the point that most people in this thread are interested in. If I had invested all my money on Airbus and won 15% per year over the last decade, it wouldn't make that strategy good.

People don't trade ETF/Index funds a lot. They sit on them. They let the market play over the long term without worrying if they lost a few cents by not waking up 3 hours early to check the pre-market reports.

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Oh, ETF aren't traded much. Right.

What "researches" point to index funds being losers? Or them being tied to "oversaturation"?

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I've pointed one in my last post, and if you google it you'll find a bunch of different articles claiming all the same thing.

Gurgeh said:

Random stock picking will beat S&P: Fund manager

The S&P 500, considered to be the a leading indicator of U.S. equities, is flawed, according to one of the U.K.'s most successful hedge fund managers.

www.cnbc.com

Cat Beats Professionals at Stock Picking

Should this be your financial advisor? A house cat named Orlando did a better job managing investments over the year 2012 than a team of professional money managers, the British paper The Observer reports. The paper ran a contest where it gave three teams—a trio of money managers, a group of [...]

www.forbes.com

Monkey beats man on stock market picks

Cass Business School puts smart beta and market cap indices to the test

www.ft.com

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"Cat beats professional money managers" is apples to oranges compared to indices. It's well-established that active management is mostly mechanism for extracting fees.

As far as the actual random stock picks go, from that article:

"Five years later, the long-only equity system he created has outperformed the market by the amount that it was supposed to outperform"

Which is how much?

“It’s not very big in the long-only space"

Right.

I pay 0.04% to Vanguard. I literally make more money buying an index and spending an extra two hours a year billing clients for work compared to doing it myself.

Captain Suave said:

I pay 0.04% to Vanguard. I literally make more money buying an index and spending an extra two hours a year billing clients for work compared to doing it myself.

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And you're right, it is indeed a good way to invest, most certainly. But I naively thought that an investing thread was a thread in which we could discuss investing strategy, not a thread in which every post is answered by : get an ETF.

Gurgeh said:

And you're right, it is indeed a good way to invest, most certainly. But I naively thought that an investing thread was a thread in which we could discuss investing strategy, not a thread in which every post is answered by : get an ETF.

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You've suggested a strategy which is more work, likely higher risk, and marginal-at-best added returns. In addition to that you've introduced several core misunderstandings of probability and randomness around which you've quietly moved the goalposts until people stopped complaining. It's not a big surprise no one is taking you seriously.

Captain Suave said:

You've suggested a strategy which is more work, likely higher risk, and marginal-at-best added returns. In addition to that you've introduced several core misunderstandings of probability and randomness around which you've quietly moved the goalposts until people stopped complaining. It's not a big surprise no one is taking you seriously.

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I'm just going to quote that $25B fund manager, who's making an even stronger claim than me and putting $1B on it :

“You choose stocks at random and weight them equally...we tested the idea and immediately did better than the S&P 500,” he said.

“If you have the same expected returns from assets you should put the same weights on them to optimize the portfolio. So if you choose stocks at random and combine them, you will always beat S&P 500, or in 99.99 percent of cases.”

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Which is basicaly extremely close to what I've argued so far. You'll even notice that the guy is making the exact same assumption as I am in his second sentence : an individual stock of the S&P500 has the same expected value as the S&P500, and they actually put their money on it.

Gurgeh said:

I'm just going to quote that $25B fund manager, who's making an even stronger claim than me and putting $1B on it :

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And he's the one I quoted who admits that, while the returns were indeed some unquantified amount higher, “It’s not very big in the long-only space" . He may have raised a billion dollars using this strategy, but the market went gangbusters during this period so of course he did well. I read the article to mean he made a billion in absolute, not a billion more than he would have made in the S&P.

So, technically better? Sure. Usefully better for individual investors? Eh?

Regardless, no one is strongly arguing against the sources you quote. The problems are with the statements you've made around them. You think you're saying the same things as your sources, but that's not true. Exhibit A:

Gurgeh said:

You'll even notice that the guy is making the exact same assumption as I am in his second sentence : an individual stock of the S&P500 has the same expected value as the S&P500

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No, that is not what he said. Read your own quote. He said if you pick stockS (PLURAL!!) at random AND COMBINE THEM then you have the same expected return, which is true (though you'll have higher variance). This is not remotely the same thing as a a random individual stock having the same expected return as a bundle of stocks. The point he's making by the emphasis on "same weights"is that his strategy does not involve preferentially selecting specific companies, industries, regions, or whatever. He's building a randomized portfolio broad enough to capture the market average. Which you can also do at next to zero cost and with literally zero effort with an index.

Now, whether the S&P tracks the market average perfectly, that's a totally separate issue.