Mutual funds

[obiwan]

well there seems to be universal disdain for mutual funds. This is odd because they offer the least risky entry to the market and are essential to know about in a portfolio. I think they're great. Here's why :

If you had invested in an ASX index mutual fund, it would have gone up by roughly what the index did this year minus 0.7% MER. Now how many people manage to equal this in their individual stock selections - VERY FEW. On a risk adjusted basis, you are probably underperforming these funds by a large amount. I mean can you compete against a fund where they employ dozens of analysts and get discount brokerage for scale by reading the fin occasionally ??? What is your edge ?

80% of individual share investors underperform the index. If you find the volatility too low then you can always leverage the mutual funds, which is riskier but if that's what you want (I would not do this).

Faulty arguments I have heard about mutual funds :
1. They charge too much - then get an index fund (MER 0.5-1% pa)
2. There is no challenge - what ?? there are hundreds of funds available here, and thousands in the US. The process of selecting a mutual fund is quite challenging. I think it is probably more than enough work than the average investor can manage if they have a full time job.
3. They don't return enough - well usually return is related to risk. If you want more risk then leverage these funds. The same techniques that apply to stock selection apply here : money and risk management, position size, rotating sectors/funds etc.
4. It's easy to beat them with individual stock selection : it is actually incredibly difficult over multiple time periods to beat the indices. That is why these active managers get paid a crapload and have performance incentives to do it (and they still fail in the majority)

What you get is a diversified portfolio WHICH IS NOT LIKELY TO GO DOWN AS MUCH as a portfolio of less than 20 stocks. If you ever accumulate a decent account then this is incredibly important - to stop yourself blowing out in the long run you need a well constructed portfolio.

Asset allocation is incredibly challenging and important in the long run. What you get with a mutual fund is diversification : if you are not sure of the benefits of this then read up on CAPM (capital asset pricing model). It is the basis for modernday portfolio construction and mutual funds. In summary it says this : you get no excess risk adjusted return by taking on stock specific risk. THE ONLY THING YOU GET REWARDED FOR IN THE MARKET IS TAKING MARKET RISK. If this sounds crazy then you need to look into it and look seriously at mutual funds.

When I started my portfolio 10 years ago, most of my friends elected to buy individual shares/ learn to trade etc. None of them have done better than the ASX 200 or MSCI over this period. Most have underperformed by a MASSIVE amount. Some blew out their investment portfolios completely.

I haven't done as well as the S&P500 over this period but I did a lot better than them. My goal is pretty agressive : learn more about asset allocation in the next decade and overperform the ASX200 by 2%pa. Maybe invest in one or two shares instead of buying lotto tickets once or twice a year. Now 2% above the ASX may seem like a pittance to you but over a decade it is a huge target.

 

[tech/a]

Hmmm.

I agree if you cant outperform the index you shouldnt be trading until you can.

There are 3% of us out there who can and do do it its just that you havent met any who can YET.

Oh by the way Nice to meet you!

Tech

 

[The Barbarian Investor]

Obiwan

I see myself as being in the managed funds through my super, however, by being personaly involved through the market and this site i am getting a bettter understanding of the Market, learning a lot and enjoying myself ( one of my stocks is up 20% in a month), i also have several properties and for one will be spending more time here untill the climate changes.

I still have a distaste from my superfunds 'brilliant' managers losing my money a couple of years back (would've been safer in the bank) this way, my mistakes are my own

The Barbarian Investor

 

[The Barbarian Investor]

Found this information Obi..

Timing

For example imagine that there are 4 investors;

The 1st was regarded as the world’s best investor and always bought the market (The Dow Jones Index) at its yearly low.
The 2nd was regarded as the world’s worst investor and bought at the Dows yearly high.
The 3rd Investor had no idea about timing and just bought at the end of each month.
And the 4th Investor always bought at the end of January each year.

How would they have done between January 1990 and December 1999?

The 1st Invest who bought at the markets low for each of the 10 years would’ve enjoyed a compounded annual rate of return of 19.1%
(Pre commissions and Taxes)
The 2nd Investor who bought at the yearly highs markets low for each of the 10 years would’ve enjoyed a compounded annual rate of return of 15.6%
(Pre commissions and Taxes)
The 3rd Investor who bought at the end of each month, each year for each of the 10 years would’ve enjoyed a compounded annual rate of return of 17.2%
(Pre commissions and Taxes)
The 4th Investor who bought in January each year for each of the 10 years would’ve enjoyed a compounded annual rate of return of 18.6%
(Pre commissions and Taxes)

Astonishingly, there is only 3.5% difference between the best and worst investor.
Furthermore there is only a 0.5% and 1.9% between the best market timer and the investor who bought at the beginning of each year or at regular intervals throughout the 10 years.

Taken over a 20 year period the returns are as follows
1st 14.2% p/a
2nd 16.2% p/a
3rd 15.1% p/a
4th 15.7% p/a

The statistics provide strong support to the view that with the exception of the mining and oil service sectors it’s not your timing of the market but rather your time in the market that counts.

Despite these facts nearly ¾ of US fund managers cannot outperform the Market Index.

 

[obiwan]

Watch who the report is from. Often the dataset is manipulated to prove an assertion by for example being selective about which year interval to include.

Generally though timing the market has not paid well in the past 10 years. Hence my underperformance in the last 10 years. However if you look at another 10 year period it would have done better. A big difference though is something like 2% per anum. If you can outperform the index consistently by just a few % over a decade this is a huge achievement. The big outperformances people report (like outperforming the index by 20% pa) are usually due to the use of additional leverage. Unfortunately by using leverage you increase the volatility, so you must ensure that whatever you are levering has a high chance of upside and is not going to blow you out if something unexpected occurs.

There are some misconceptions the financial firms perpetuate by sleight of hand with seemingly logical arguments :

1. Everyone can be a capitalist - therefore everyone must trade individual shares. Yes everyone should be a capitalist and maximise their portfolio return, it does not follow that you should go out and buy individual shares
2. It's time in the market not timing - this maybe true for 1990-1999 but what about 1930-1939 ? Time in any market is risk. It obviously pays when it is a bull market. But does this mean you should always be in the sharemarket as an asset ? Time in which market (there are other alternatives to cash and the sharemarket) ?

Asset allocation and leverage have been the main determinants of my portfolio return over the last decade. Despite underperforming the indices and not being a great market timer my return on equity has been 40% per annum over the decade. This is because I got my asset allocation (shares, property, cash, bonds) vaguely correct during the cycle, shifted appropriately and I used leverage when I felt the risk was low.

That most people spend their time on individual stock selection is unwise from my experience. I spend 60% of my time on asset allocation, 20% on deciding about whether to use leverage, 10% on market timing and 10% on selecting funds. The big money (90% in my opinion) is on deciding when to shift your tactical asset allocation, it never ceases to surprise me that people generally tend to spend no more than 10% of their time on this.

 

[tech/a]

OBI

Everyone has or should have their own methodology of creating wealth.

If youve got one (a methodology) your up on 97% of people.
Is yours the best or mine------who cares it suits us.Your happy with a 10 yr return of 40% P/A.
I personally dont place a figure on that(It will be what it will be) but have been fortunate enough to increase my nett wealth 5 fold in 8 yrs.(Business,Property and Trading).

If I/ we can pass on a hint or 2 to help others then great----wether they implement them is yet another thing-----few have the ability to "Pull the Trigger" youll find very few wealthy financial Planners/Advisors!!(I Mean seriously wealthy $1 mill+ excluding their own house ).

 

[DTM]

Hi All

I am a beginner mainly dealing in options (full time for three months) but the last month have been delving into shares. I have a system that I've developed and wanted to know if anyone else is doing the same.

My system consists of scanning for volume spikes and news announcements.

I would generally buy if
1) the stock is below 50 cents
2) The volume spike is worth millions ($)
3) The chart shows that it has bottomed out, or
4) The chart shows that after an initial price spike, it had pulled back and was on its way up again.
5) If after the first 1/2 hour of the price spiking it pulls back to a new low and then rebounds past the initial high then I would buy.
6) Sell out at the end of the day taking back the initial investment.

Developing the system cost me 2k as my initial testing found that the price easily gapped down if the above conditions weren't met. Tight stops kept my losses to a minimum and recent trades have now been relatively successful.

I use this method mainly as an asset builder. I leave the profit there for the long term in the hope that in a few years time the shares appreciate in value. I use options mainly to generate cashflow.

My successful trades so far have been
B 10,000 HHG @ 1.20, Sold @ 1.36 two weeks later (didn't keep profits in)
JVR 70,000 shares (only profits left in now)
RRS 90,000 shares (only profits left in now)
LKO 180,000 shares (bought on news and waiting for price to move)

I also exercised 25 contracts on HHG paying on average 1.23 per share for the 25,000 shares as they are supposed to pay 73 cents per share dividend in March.

I am still refineing the system. I basically want to know if anyone else does this to confirm that it works or whether its beginners luck.

Your evaluations would be appreciated.

 

[tech/a]

DTM.

I have tested similar Volume spike strategies,actually many of them.

Im yet to find a profitable Daytrading/Very short term stratagy

I do know of One successful short term trader but he spends hrs at the screen.Not something I wish to do.

Im now coming to the conclusion that to do it (IE Take advantage of the odd (and it is ODD) 100 to 200% move) you need to trade in a discretionary manner.Have very good knowledge of price action/risk management and trade short term ONLY FOR THE FUN.Being 100% sure of expectancy isnt going to happen due to the number of variables in discretionary trading.However best practices may just get you over the line.(Ill tell you next year.) I intend to allocate funds to test the idea this year---actually doing it now.

Wealth creation doesnt come from here!In My View

My guess would be that your undercapitalised (trading options and looking for a short term methodology).
Looking for 100% gains so a capital of $30K (For example) returns a fair sum $30K.Not so easy!!
$300K returning 10% same return-----Not so Hard.

I like some of your stratagies like leaving only profit in your speccies.

tech

 

[crashy]

if you are not sure of the benefits of this then read up on CAPM (capital asset pricing model). It is the basis for modernday portfolio construction and mutual funds

nice try, but I think you should read up on it first:

Capital Asset Pricing Model - CAPM

A model describing the relationship between risk and expected return that is used in the pricing of risky securities. CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. If this expected return does not meet or beat the required return then the investment should not be undertaken.

The lingo you wanted was MPT:

Modern portfolio theory is the philosophical opposite of traditional individual stock picking. It suggests that investing in the market as a whole is statistically a more successful strategy than individual stock allocation based on fundamental or technical analysis.
Basic portfolio theory was originated by Harry Markowitz (Nobel Prizewinner) in the early 1950’s. While investors before then knew intuitively that it was smart to diversify (ie. Don’t "put all your eggs in one basket.") Markowitz was among the first to attempt to quantify risk and demonstrate quantitatively why and how portfolio diversification works to reduce risk for investors.

...they offer the least risky entry to the market.....

least risky? compared to what? prove it.

If you had invested in an ASX index mutual fund, it would have gone up by roughly what the index did this year minus 0.7% MER.

So........wheres the benefit? Why pay 2-3% entry and exit fees plus another percent or two in management expense to get a result which isnt any better than investing directly in the index?

Faulty arguments I have heard about mutual funds :
1. They charge too much - then get an index fund (MER 0.5-1% pa).

and what about entry / exit fees?

There are many alternatives to managed funds:

- basket instalment warrants
- index instalment warrants
- index options
- index CFDs

If fund managers consistently fail to outperform the index, as statistics prove, then why not invest directly into the index itself? Why pay fund managers a premium for performing worse?

 

[tech/a]

If fund managers consistently fail to outperform the index, as statistics prove, then why not invest directly into the index itself? Why pay fund managers a premium for performing worse?

HEAR HEAR!!

 

[obiwan]

Index funds are great, I am a big fan. If you are paying a 2% entry fee, you are being ripped off. They should be refunded if you buy smartly.

Now what I get from CAPM is that variance is related to risk which is related to return. What it shows in a roundabout way (with some unrealistic assumptions) is that you do not get an excess risk adjusted return for taking firm specific risk.

Basically YOU DO NOT GET AN EXCESS RETURN FOR NOT BEING DIVERSIFIED. You can take on more risk by buying individual shares (a portfolio of 1-5 say) but you get a LOWER RISK ADJUSTED return than the market portfolio. It is actually a very profound concept and counterintuitive initially.

Ok say you buy one stock, this has a higher variance than the index. What CAPM implies is that adjusted for risk/variance, you do worse than a basket of stocks or the index. Mutual funds are a cheap way to access the 'index', what they have done is make available to retail investors who would otherwise only be able to afford a few stocks the benefits the RAR on a market portfolio.

Instead of buying an individual stock you could for the same variance buy the index on leverage with a greater return.

Daytrading : Even Livermore said that he didn't find it profitable. He said you make most of your money on the primary trend or countertrend. He said very short term trading is a lot of noise and obsessing. Someone described it as like masturbation, this repetitive, obsessive, ritualistic activity. Not a good thing to do all day for you balance sheet or mental health.

 

[tech/a]

Index funds are great, I am a big fan. If you are paying a 2% entry fee, you are being ripped off. They should be refunded if you buy smartly.

Now what I get from CAPM is that variance is related to risk which is related to return. What it shows in a roundabout way (with some unrealistic assumptions) is that you do not get an excess risk adjusted return for taking firm specific risk.

Basically YOU DO NOT GET AN EXCESS RETURN FOR NOT BEING DIVERSIFIED. You can take on more risk by buying individual shares (a portfolio of 1-5 say) but you get a LOWER RISK ADJUSTED return than the market portfolio. It is actually a very profound concept and counterintuitive initially.

Hmm you mention that this is a concept rather than factual.
I can prove using the 2 positive expectancy trading models I trade that Having less stocks in my portfolio will give me greater return.
Define for me your understanding of "Risk adjusted return" ??

Ok say you buy one stock, this has a higher variance than the index. What CAPM implies is that adjusted for risk/variance, you do worse than a basket of stocks or the index. Mutual funds are a cheap way to access the 'index', what they have done is make available to retail investors who would otherwise only be able to afford a few stocks the benefits the RAR on a market portfolio.

Instead of buying an individual stock you could for the same variance buy the index on leverage with a greater return.

Daytrading : Even Livermore said that he didn't find it profitable. He said you make most of your money on the primary trend or countertrend. He said very short term trading is a lot of noise and obsessing. Someone described it as like masturbation, this repetitive, obsessive, ritualistic activity. Not a good thing to do all day for you balance sheet or mental health.

Yes agree usually sends the participants BLIND to any other form of trading.
These are normally those who want to turn $10K into $1 mill tommorow and who believe that 100% profit trades are common place. Still there are methods which will outstrip Mutual funds by miles--I chose to trade these and they dont have any more risk infact Id argue less risk than Mutual Funds

Tech/a

 

[wayneL]

<<Daytrading : Even Livermore said that he didn't find it profitable. He said you make most of your money on the primary trend or countertrend. He said very short term trading is a lot of noise and obsessing. Someone described it as like masturbation, this repetitive, obsessive, ritualistic activity. Not a good thing to do all day for you balance sheet or mental health.>>

Of course I disagree. But Tech knew I would!

The part of my capital that I daytrade with gives me the greatest % return.

But you are limited by position size...even in the US markets.

So not a great deal of my capital is daytraded.

Agree that not many cut it as daytraders though...it's too emotionally challenging for most. Gotta be like a robot.

And robots dont masterbate. Not whilst daytradingh anyway

Cheers

 

[tech/a]

Sorry Wayne.

Thats 2 short term traders I know (well in your case suspect) are making a profit.
Id have thought fills in the US would be very rarely effected by liquidity.
What are you trading?(The second board?)

 

[tech/a]

Sorry Wayne.

Thats 2 short term traders I know (well in your case suspect) are making a profit.
Id have thought fills in the US would be very rarely effected by liquidity.
What are you trading?(The second board?).

OBI your good fun!

 

[wayneL]

Tech,

Usually stocks within the Nasdaq 100, so some of the biggest.

Its not usually an issue sometimes I still find I can take out 2 or 3 lines of market depth at times on some stocks past a certain position size...if I'm using "at market" orders.

Not too much off an issue on trend days, but on sideways days where I am forced to scalp you can still bleed a bit from slippage.

 

[obiwan]

actually, I don't want to sound too negative about finding a system. If you feel you need to do it, keep doing it. However I am just warning you that it is not likely to be a way to riches (or at least a better way than mine over 10 years .

'I can prove using the 2 positive expectancy trading models I trade that Having less stocks in my portfolio will give me greater return.'

Absolute return is not important. The critical variable is variance/ standard deviation of returns. You can always lever up the portfolio : this increases absolute return but also variance by a proportionate amount. The risk adjusted return can be measured by eg sharpe ratio =S(x)=( rx - Rf ) / StdDev : (x)
x is your trading portfolio
rx is the average annual rate of return of x
Rf is the best available rate of return on a "risk-free" security (i.e. cash)
StdDev(x) is the standard deviation of rx

Also if you are trading on maximum margin, and your max drawdown is say 20% you need to add this to your capital base in calculating return on portfolio : ie 30% margin, 70% loan, 20% in reserve trading fund. Capital is the 30% + 20%, and returns should be based on this.

 

[obiwan]

here is a longer elaboration of RAR using the sharpe ratio :

http://www.miapavia.com/homes/ik2hlb/sr.htm

 

[tech/a]

actually, I don't want to sound too negative about finding a system. If you feel you need to do it, keep doing it. However I am just warning you that it is not likely to be a way to riches (or at least a better way than mine over 10 years .

Ive actually stopped "doing it" and am trading it.My trading returns over the last 2.5 yrs exceed your returns for the next 10 so if I stop now???Thanks for the warning.

'I can prove using the 2 positive expectancy trading models I trade that Having less stocks in my portfolio will give me greater return.'

Absolute return is not important. The critical variable is variance/ standard deviation of returns. You can always lever up the portfolio : this increases absolute return but also variance by a proportionate amount. The risk adjusted return can be measured by eg sharpe ratio =S(x)=( rx - Rf ) / StdDev : (x)
x is your trading portfolio
rx is the average annual rate of return of x
Rf is the best available rate of return on a "risk-free" security (i.e. cash)
StdDev(x) is the standard deviation of rx

Ahh I love NUMBERS.Standard deviation on 20000 portfolios has been shown to be less than 3%,with none of the outliers being negative.My software doesnt calculate the Sharpe ratio---I think Amibroker does so Ill ask someone to supply it out of curiosity,still it wont have an influence on what I do.

Also if you are trading on maximum margin, and your max drawdown is say 20% you need to add this to your capital base in calculating return on portfolio : ie 30% margin, 70% loan, 20% in reserve trading fund. Capital is the 30% + 20%, and returns should be based on this.

You mean portfolio drawdown,and I believe you also mean INITIAL Drawdown not Peak to Valley Drawdown.In which case the issue isnt an issue once your portfolio has enough profit to cover initial drawdown.
The Sharpe ratio is only one method of "argueably maximising" use of funds.There are others and are worth considering IF your using huge sums of money and can employ an analyst to keep check on your Sharpe ratio or any other ratio.Im not an institution(perhaps a legend in my own lunchtime!) and as far as I know nobody else here is either.

tech/a

 

[markrmau]

tech/a

Hi Tech, You asked on another thread how to split up the quotes.

When you press the Quote button, have a look at the "tags" enclosed in square brackets that appear ->

(Left square bracket)QUOTE=some_name(Right square bracket)......quoted text...... (Left square bracket)/QUOTE(Right square bracket)

Then just copy this format with the next quote

Keep up the informative posts

Cheers, Mark.