201–210 of 221 posts
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Luck can be the actual explanation. By the law of the large numbers, some funds will be a success for quite some time. Just as some people do win the lottery. I don't think it's surprising that a couple of funds have a great track history even if the game is just pure luck.
How do you distinguish between pure luck and actual skills?
There are models to model the risks and the potential outcomes.
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They trade very, very often. You can be lucky if you buy a couple of stocks and wait around a few years. Someone I know had parents who bought Nokia in the 1980s and sat on it until the mid 200s. That's luck. You can guess a coin flip 5 times in a row. A few people out of a hundred will do so. But you cannot get significantly over 50% correct on millions of coin flips. That's not luck.
First of all, I explicitly said that it's not wrong to attribute winners to skill, but you still feel the need to put my argument in a binary box, very well. Your mistake is treating each trade as an independent event. But in reality all those trades may share a single methodology which can be invalidated by a single unprecedented market change. Yeah, a fund is a perennial winner until it's not. You can call it being…
They largely are.
The people who fall under your criticism are the old school stock pickers. For instance, people who've grown up during the long decline of inflation and rates might have hit a wall over the last few years. A lot of those guys were essentially riding the same wave over multiple trades.
But the kind of trading done in stat arb is largely independent of such long term trends. They change around their positions so often that there's hardly any regime that they are biased towards. High vol? Been long and short. Rates going up/down? Been long and short. Economy? Been long and short.
Sure, there might be some hidden regime that we've yet to hear about, that's possible. But there's quite a difference between the quantitatively astute funds and the other long-lived ones.
I recommend Weathfront and Betterment to all my less mathematically inclined friends. However, if you spend only a few hours getting acquainted with asset allocation and rebalancing principles, you can do pretty everything that these services do without their fees.
Wealthfront is 3x (.25% vs .05%) more expensive than a lot of great Vanguard funds [1]. And with Wealthfront you might be investing in major index funds anyway except you end up paying more. Why not go with any of Vanguard's S&P 500 funds (mutual fund or ETF) or any other index fund of your choice under Vanguard? I doubt Wealthfront can beat their returns after you factor in cost in the long run (20+ years). Also Van…
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And what do you recommend for your mathematically inclined friends? Any books you recommend for asset allocation and rebalancing principles?
None, just put your money in an S&P 500 fund. I doubt you will be able to beat that in the long run anywhere else (Even though there are flaws w/ how the S&P 500 is run now [1]). [1] http://www.joshuakennon.com/sp-500s-dirty-little-secret/
60% US 30% Int'l 6% REITs 4% Gold
All of this can be bought with low cost mutual funds.
Here is a graph of my personal account which I manage myself vs the S&P 500 index. I am currently beating it with gains on the year of 7.3%, but only thanks to the last couple of strong months. I was deep in the red early on. http://imgur.com/a/XHNTZ
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Not just actively managed funds. There will always be proprietary traders speculating with their own or their employer's capital. As long as some kind of active investors make up ~10% of the market that will be sufficient for price discovery.
That 10% will be insiders.
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Your second point has nothing to do with indexing and everything to do with asset allocation. If you're nearing retirement, you shouldn't be holding risky assets like equities.
> If you're nearing retirement, you shouldn't be holding risky assets like equities. That is not quite right. When entering retirement, most people can expect to live for at least 20 more years, which means they should hold a non-insignificant fraction of their wealth in stocks.
Further, those who find themselves in the fortunate situation of being overwhelmingly likely to leave a significant estate to their children should consider investing their funds according to the life expectancy of the children, not their own.
Personally, I use Betterment (a competitor to WealthFront) simply becasue I can set a target asset allocation, and they will balance my portfolio accordingly. The tax loss harvesting capabilities that both companies offer are really interesting, theoretically, but there is no empirical evidence either way as to whether it actually will save you money in the long-run. Before betterment, I invested in mid-large cap index funds from Vanguard.
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Luck can be the actual explanation. By the law of the large numbers, some funds will be a success for quite some time. Just as some people do win the lottery. I don't think it's surprising that a couple of funds have a great track history even if the game is just pure luck.
No, luck cannot be the explanation for what these quant funds do. These funds are run by mathematicians. People with PhD's in probability and physics. They are not being fooled by randomness. They are right, and they are right consistently. However, they are also at least generally, not making traditional 'investing' decisions. They are making statistical arbitrage bets - they are looking for instances where misprici…
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Do you really think the average stock owner has the ability or training to asses companies, in their spare time? Honest question. I'd answer no, considering that even trained professionals aren't so amazing at it.
I think we as hackers can use our abilities to analyze certain companies better than the professionals. Example 1: track the Google rankings of companies that rely a lot on search engine traffic. see if any have dropped a lot from a major algorithm change (i.e. Demand Media) Example 2: use the Facebook graph API to do the same for companies that rely a lot on Facebook for traffic. Example 3: at the end of every month…