A Long Bet
- Thread starter craft
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Worth thinking about.
How much of the funds flow control needs to be value aware before unaware funds can causes bubble havoc.
Most technical analysis is value unaware. Is funds flow from technical any different to fund flow from value unaware ETF Investing - should the two be lumped together when thinking about the funds flow issue.
How effective is averaging over time? so as to ensure entry on both sides of the swing. Does the magnatude of the pendulum swing matter? it certainly does if you only get one part of the swing - but what if your investment horizion is greater than a few full swings.
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Isn't that incredible that none of the funds beat the index.
skc
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I don't think anyone can work out an exact answer, but my anecdote observation of individual stocks trading is that, it doesn't take a lot of volume on one side to offset the balance. I don't know where's the tipping point but I think there should be some evidence showing up if we do reach that point. Some of these may include low overall market volatility and low relative volatility between stocks (i.e. weighting remains stable). We are seeing these in equity markets but they are certainly not sufficient proof. There are probably more evidences that I haven't thought about.
True when the market goes up. But ETF investing is predominately long only while technical analysis presumably can go long and short. So technical flows can be counterbalancing in nature, provided that there's something to trigger the direction change in the first place.
Some pretty average performance there by the funds. I do suspect that Buffet picked easier targets in Fund of funds. Let's say 20% of funds outperform the index, the chance of a fund of funds with say 8-10 separate funds to outperform the index has to be infinitely smaller, even before accounting for the additional layer of fees.
skc
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I had to do some Google search to brush up on probability theories on this... but using some assumptions for illustration purposes:
- Each individual fund has a 20% chance to outperform the index
- A fund of funds held 10 investments
- The magnitude of overperformance is slightly better than the underperformers, such that if the fund of funds picked 5 overperformers and 5 underperformers, it will out perform the index after fees.
=> The chance of picking 5 outperformers = ~2.64% in any one year
=> The formula is 10c5 x 0.2^5 x 0.8^5 (It's called binomial distributions - sure prompted some very faded memory of highschool maths)
=> The chance of picking 5 outperformers over 10 years quickly approaches infinitely small... not to mention the fact that if you underperformed one year, you will need to catch up on the underperformance last year before you can outperform over 2 years.
Buffet was never going to lose this wager.
P.S. This of course doesn't take into account that one absolute runaway winner gets selected which dwarfs the other 9 underperformers... but by definition the runaway winner would be even harder to pick.
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If I recall correctly, the last time craft posted so many times on the topic of being long in the market, there was a a strong run up. I think the delay was about a month or so.
Value Collector
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Here is Buffett explaining the bet and the results at the Berkshire annual meeting.
skc
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Thanks for the link.
skc/craft, I work in the financial planning industry and over the last few years our view on investing has changed dramatically given the guidance of a predominant international funds manager that is essentially of a passive nature. The stats on what proportion of active funds outperform the index net of fees are astounding and that's only over specific timeframes.
For instance some materials I have access to but can't actually quote on here for confidentiality reasons (so take it with a grain of salt if you wish) basically states that for the period ending 31 December 2015 the following applied. Note this is for US equity funds but its very similar in Aus:
3 Year performance - 87% of the active funds around 3 years ago survived, 36% outperformed index
5 Year performance - 76% of the active funds around 3 years ago survived, 29% outperformed index
10 Year performance - 59% of the active funds around 3 years ago survived, 21% outperformed index
15 Year performance - 43% of the active funds around 3 years ago survived, 17% outperformed index
The stats are even worse for fixed income based fund managers.
Further to this here are some other stats. In the period ending 31 December 2010:
3 Year performance - 31% of funds outperformed the index to 31 Dec 2010, of that 31% only 35% of those funds continued to outperform in the following 4 years.
5 Year performance - 27% of funds outperformed the index to 31 Dec 2010, of that 27% only 33% of those funds continued to outperform in the following 4 years.
10 Year performance - 20% of funds outperformed the index to 31 Dec 2010, of that 20% only 37% of those funds continued to outperform in the following 4 years.
So even picking the very best 10 year performers only give you a very marginal increased expectation that they will even continue to outperform over the next 4 years.
Basically the research shows that the main sector that active fund managers add some value is smaller companies but even so, a fund manager that outperforms in this space experiences increases in FUM and will eventually conform to the norm.
It sounds boring to invest in passive funds but the stats, returns and minimal fees speak for them self as far as I'm concerned. However by using a passive approach it means you're extremely unlikely to do worse then anyone else and it also gives you a chance to concentrate on other strategies or areas of your financial position that can further enhance your lifestyle.
I'm not surprised at all the Buffet won the bet. Even the very best active fund managers are unlikely to repeatedly outperform net of all fees.
For instance some materials I have access to but can't actually quote on here for confidentiality reasons (so take it with a grain of salt if you wish) basically states that for the period ending 31 December 2015 the following applied. Note this is for US equity funds but its very similar in Aus:
3 Year performance - 87% of the active funds around 3 years ago survived, 36% outperformed index
5 Year performance - 76% of the active funds around 3 years ago survived, 29% outperformed index
10 Year performance - 59% of the active funds around 3 years ago survived, 21% outperformed index
15 Year performance - 43% of the active funds around 3 years ago survived, 17% outperformed index
The stats are even worse for fixed income based fund managers.
Further to this here are some other stats. In the period ending 31 December 2010:
3 Year performance - 31% of funds outperformed the index to 31 Dec 2010, of that 31% only 35% of those funds continued to outperform in the following 4 years.
5 Year performance - 27% of funds outperformed the index to 31 Dec 2010, of that 27% only 33% of those funds continued to outperform in the following 4 years.
10 Year performance - 20% of funds outperformed the index to 31 Dec 2010, of that 20% only 37% of those funds continued to outperform in the following 4 years.
So even picking the very best 10 year performers only give you a very marginal increased expectation that they will even continue to outperform over the next 4 years.
Basically the research shows that the main sector that active fund managers add some value is smaller companies but even so, a fund manager that outperforms in this space experiences increases in FUM and will eventually conform to the norm.
It sounds boring to invest in passive funds but the stats, returns and minimal fees speak for them self as far as I'm concerned. However by using a passive approach it means you're extremely unlikely to do worse then anyone else and it also gives you a chance to concentrate on other strategies or areas of your financial position that can further enhance your lifestyle.
I'm not surprised at all the Buffet won the bet. Even the very best active fund managers are unlikely to repeatedly outperform net of all fees.
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Buffett et al seem to think that the poor performance of the hedge funds are due entirely to their fees.
I don't think so, as their performances are much less than the 2%pa they gouge. I think they chase rainbows, hold their losers too long and don't know their portfolio risks (LTCM). They're basically incompetent traders (IMHO).
I realise that huge funds can't move as quickly as they'd like, but they've got the financial markets of the whole world to play with and the computing power to do it.
I don't think so, as their performances are much less than the 2%pa they gouge. I think they chase rainbows, hold their losers too long and don't know their portfolio risks (LTCM). They're basically incompetent traders (IMHO).
I realise that huge funds can't move as quickly as they'd like, but they've got the financial markets of the whole world to play with and the computing power to do it.
Value Collector
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when looking at them as a group, the performance of the good ones is offset by the performance of the poor ones, which puts their returns at about the market rate, then you deduct the fees, and that drags the performance below the market rate.
skc
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Here's a good article articulating my thoughts on passive flows far more eloquently than I ever could... and with numbers to demonstrate what is already happening in the US market.
http://www.thebull.com.au/premium/a...the-rise,-but-is-it-a-sensible-strategy-.html
Reading this has me reasonably convinced that the passive-overwhelms-all point has been reached in the US. The question now is how can one make use of this information.
skc, without giving it a huge amount of thought my assumption would be (and that article eluded to it) is that the big companies will simply get bigger.
For example as the aus market has nowhere near the level of ETF's or stocks as the US, think of the big 4 banks. They are in almost every passive ETF for the aussie market and are always in the top 10 holdings due to their size. My assumption would be that all these passive flows that MUST be directed to the banks because of their mandate's would simply mean the natural progression of the banks share price even without any major increases in profit, revenue, etc etc (similar to amazon in the article).
Now the banks are just one example but my guess is it essentially applies to majority of the largest stocks on the ASX and is further compounded by the natural flow of funds from our super system.
Note the above is all just guesswork on my part based on the article skc posted and thinking of a method to take advantage of it. My thinking would be find the biggest stocks that are in the most index's and/or passive funds and make them your core holding whilst possibly eliminating or allocating less to those that are more cyclical or likely to suffer from adverse headwinds.
i.e.:
CBA
ANZ
WBC
NAB
CSL
TLS
WES
WOW
WPL
That would be my starting point for an aussie version although not sure if passive style investing and ETF's are still too much in their infancy here compared to the US.
For example as the aus market has nowhere near the level of ETF's or stocks as the US, think of the big 4 banks. They are in almost every passive ETF for the aussie market and are always in the top 10 holdings due to their size. My assumption would be that all these passive flows that MUST be directed to the banks because of their mandate's would simply mean the natural progression of the banks share price even without any major increases in profit, revenue, etc etc (similar to amazon in the article).
Now the banks are just one example but my guess is it essentially applies to majority of the largest stocks on the ASX and is further compounded by the natural flow of funds from our super system.
Note the above is all just guesswork on my part based on the article skc posted and thinking of a method to take advantage of it. My thinking would be find the biggest stocks that are in the most index's and/or passive funds and make them your core holding whilst possibly eliminating or allocating less to those that are more cyclical or likely to suffer from adverse headwinds.
i.e.:
CBA
ANZ
WBC
NAB
CSL
TLS
WES
WOW
WPL
That would be my starting point for an aussie version although not sure if passive style investing and ETF's are still too much in their infancy here compared to the US.
Value Collector
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Here is an article by the guy that lost the bet.
https://www.bloomberg.com/view/articles/2017-05-03/why-i-lost-my-bet-with-warren-buffett
https://www.bloomberg.com/view/articles/2017-05-03/why-i-lost-my-bet-with-warren-buffett
skc
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Yes I agree. And the fact that this hasn't been observed in the ASX means the active/passive probably hasn't quite hit the tipping point yet. However I think it's definitely happening in the Gold space where GDX/GDXJ are causing havoc and throwing relative valuations out of whack.
Yes this would be one way to take advantage... literally to go with the flow. However, if the passive dominance becomes a problem and whatever prevailed has to unwind... you would obviously act in the exact opposite manner.
Here's another great article on this issue.
http://www.barrons.com/articles/man-vs-machine-how-has-indexing-changed-the-market-1499491233
Value Collector, that article wreaks of someone trying to save face. Of course its in his interest to defend why he lost the bet and not only that its almost as if he claims having a larger universe of stocks/options to invest in is actually a negative to an active managers performance. Found it quite laughable to be honest.
SKC, any idea what say the top 10, 20, 30, 40 or 50 stocks on the ASX have returned (without including cyclical's like miners) vs the all ords for instance? I had a quick look yesterday when doing my reply above and the 9 stocks I mentioned outperformed the all ords by 2% over the last 12 months and thats ignoring dividends.
SKC, any idea what say the top 10, 20, 30, 40 or 50 stocks on the ASX have returned (without including cyclical's like miners) vs the all ords for instance? I had a quick look yesterday when doing my reply above and the 9 stocks I mentioned outperformed the all ords by 2% over the last 12 months and thats ignoring dividends.
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Kermit345, I agree the article by the loser is hogwash. I bet if they made another 10 year bet immediately after this bet ends Buffett would most likely win again.
He even admits that when he compares his performance to the MSCI which he deems as a more relevant benchmark they still did not achieve much "the MSCI All Country World Index, almost exactly matched hedge-fund returns during the same nine-year period of our bet".
He even admits that when he compares his performance to the MSCI which he deems as a more relevant benchmark they still did not achieve much "the MSCI All Country World Index, almost exactly matched hedge-fund returns during the same nine-year period of our bet".
skc
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Yeah... everything he said made sense, but collectively it's pretty garbage.
No I don't have the figures handy but the way to do it is to work out the returns for all the stocks and see if the top performers are over represented in certain size categories.
But the ASX market is really narrow so even if you find interesting observations you can probably come up with several different explanations to rationalise them.
