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This is why investing in an index fund is a great decision. When you rely on more active management, you pay higher fees, and your returns are likely to be about average (or worse). With an index fund you can take a healthy return, mitigate risk by diversifying well, and pay a fraction of the fee (which equates to hundreds of thousands of dollars over 30-40 years from the added growth).
A quote from Warren Buffet: "In addition to the ones benefitting from short-term luck, I believe it possible that a few [stock portfolio managers] will succeed—in a modest way—because of skill." Yes, but with an appropriate degree of scientific skepticism, the "skill" assumption could actually be chance. And Occam's razor argues that chance is the more likely cause, not skill. For 100 stock fund managers buying and s…
The problem is fundamentally that fund managers consume a large portion of the returns, after you factor the cost of the fund manager the result is negative. To put it succinctly: On average fund managers reduce ROI. As an alternative measurement, if you take the funds managed by most managers and look at the portfolio 1 year ago the fund would be better off with the previous year's portfolio. (This time mostly becau…
Yes, a point I make in my article, but didn't make in my post. Fund managers are very difficult to justify.
Meta: QZ is utterly unreadable to me on both desktop and mobile. Fortunately there's Readability.
Actual letter (plus some other blowhard commentary) at:
http://finance.fortune.cnn.com/2013/08/15/warren-buffett-kat...
A quote from Warren Buffet: "In addition to the ones benefitting from short-term luck, I believe it possible that a few [stock portfolio managers] will succeed—in a modest way—because of skill." Yes, but with an appropriate degree of scientific skepticism, the "skill" assumption could actually be chance. And Occam's razor argues that chance is the more likely cause, not skill. For 100 stock fund managers buying and s…
What is the market? A bunch of fund managers. So your critique about not beating the median like saying half of all hockey players are worse than the median and so hockey is just a game of chance. You have to fix your prior. Track performance for some period of time. Then track the winners. This will show whether it's a game of skill or chance.
This is like saying all personal relationships are limited to prostitutes. One can buy stocks directly, or invest in index mutual funds that don't have managers, for the reason that no management is required.
> Then track the winners. This will show whether it's a game of skill or chance.
But that's been done -- the WSJ Dartboard Contest showed that the experts don't do better than throwing darts at a list of stocks.
http://online.wsj.com/article/SB1000142412788732450470457841...
My point is that buying and holding an index fund, and relying on long-term market growth instead of phony expertise, is a much better approach to equity investment.
"I’d be a bum on the street with a tin cup if the markets were always efficient”
A quote from Warren Buffet: "In addition to the ones benefitting from short-term luck, I believe it possible that a few [stock portfolio managers] will succeed—in a modest way—because of skill." Yes, but with an appropriate degree of scientific skepticism, the "skill" assumption could actually be chance. And Occam's razor argues that chance is the more likely cause, not skill. For 100 stock fund managers buying and s…
> For 100 stock fund managers buying and selling stocks, statistics tells us that 50 of them will do better than the market averages (and 50 will do worse). 50 will do better/worse than the MEDIAN of that GROUP OF 100 fund managers, not the market averages.
Oh, the managers will do worse than the market averages, because even if they avoid dumb moves, they will charge you for the privilege of managing your portfolio.
My original remark was meant to measure their performance before fees, as the WSJ Dartboard Contest did it (a contest in which the managers weren't able to keep up with market averages).
EDIT: for a symmetrical distribution, a distribution for which a classic Gaussian curve is appropriate, the median and the mean are the same.
A quote from Warren Buffet: "In addition to the ones benefitting from short-term luck, I believe it possible that a few [stock portfolio managers] will succeed—in a modest way—because of skill." Yes, but with an appropriate degree of scientific skepticism, the "skill" assumption could actually be chance. And Occam's razor argues that chance is the more likely cause, not skill. For 100 stock fund managers buying and s…
A quote from Warren Buffet: "In addition to the ones benefitting from short-term luck, I believe it possible that a few [stock portfolio managers] will succeed—in a modest way—because of skill." Yes, but with an appropriate degree of scientific skepticism, the "skill" assumption could actually be chance. And Occam's razor argues that chance is the more likely cause, not skill. For 100 stock fund managers buying and s…
You can say that about many things. Do Musk and Messi have "skill" or is their success just chance?
Also, there are any number of convincing scams meant to distort one's thinking. My favorite is one I call "Miracle Man", in which a manager mails you six perfectly correct monthly predictions, all in advance of the real market they predict, then asks to take over your portfolio. Hard to believe, but it's a scam, it isn't real:
A quote from Warren Buffet: "In addition to the ones benefitting from short-term luck, I believe it possible that a few [stock portfolio managers] will succeed—in a modest way—because of skill." Yes, but with an appropriate degree of scientific skepticism, the "skill" assumption could actually be chance. And Occam's razor argues that chance is the more likely cause, not skill. For 100 stock fund managers buying and s…
Warren Buffett once wrote an article about the points you are making: http://www.tilsonfunds.com/superinvestors.pdf . Interesting read
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I would like you to imagine a national coin-flipping contest. Let's assume we get 225 million Americans up tomorrow morning and we ask them all to wager a dollar. They go out in the morning at sunrise, and they all call the flip of a coin. If they call correctly, they win a dollar from those who called wrong. Each day the losers drop out, and on the subsequent day the stakes build as all previous winnings are put on the line. After ten flips on ten mornings, there will be approximately 220,000 people in the United States who have correctly called ten flips in a row. They each will have won a little over $1,000.
Now this group will probably start getting a little puffed up about this, human nature being what it is. They may try to be modest, but at cocktail parties they will occasionally admit to attractive members of the opposite sex what their technique is, and what marvelous insights they bring to the field of flipping.
Assuming that the winners are getting the appropriate rewards from the losers, in another ten days we will have 215 people who have successfully called their coin flips 20 times in a row and who, by this exercise, each have turned one dollar into a little over $1 million. $225 million would have been lost, $225 million would have been won.
By then, this group will really lose their heads. They will probably write books on "How I turned a Dollar into a Million in Twenty Days Working Thirty Seconds a Morning." Worse yet, they'll probably start jetting around the country attending seminars on efficient coin-flipping and tackling skeptical professors with, "If it can't be done, why are there 215 of us?"