Re: Evaluating Managed Funds
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his SuperInvestor stuff is such non-sense. Warren Buffet is an investor. The rest of us just trade shares of companies. Big difference.
The babble I was referring to was coming from you. Warren Buffet is an investor that buys businesses and actively participates in their management.
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RockRock,
I'm not sure I'm going to be able to get through to you since your Fama brainwashing seems complete, but Fama has never been able to refute the arguments in the SuperInvestor speech. Let's recap where it started.
Fama and other EMT guys were confronted with the fact that Buffett had averaged a high return (over 25% annually in his first 30 years or so) for a very long time. At first they just called him an "outlier". Buffett's speech points out that there is a family of outliers all descended from Ben Graham (several who worked directly for him), who all operate with the same philosophy, but buy different things. Even if you believe that these guys are one in a million exceptions, it doesn't make sense that the exceptions are tightly packed in one corner of the universe.
And the problem is that Buffett isn't one in a million by EMT theory, he's one in a trillion. Buffett's old joke is that the EMT guys just keep adding a sigma as he keeps beating the market.
So Fama decided to come up with another explanation. Buffett's not an investor, he's a businessman who actively manages businesses. This idea is a laughable fraud. First, for the first part of Buffett's career, he was just the lead investor of a tiny fund, who had little contact with management of his investments. And that was his period of greatest outperformance, he crushed the market a 35%+ annually.
As he managed more money, he was forced to take a more "active" role with managemnet in some rare cases. But that role can hardly be credited with providing outperformance. In some cases, Disney for example, management didn't give a horses behind for his views, so he was forced to sell. In others, Coke, it was just a great business run by great ma management (at the time). They had the same views. And since then, Coke management has screwed up left and right, despite his "influence".
Mostly, he likes to buy companies outright at great prices when given the chance. But do you really think he's responsible for the success of See's candies over the last 30 years? Berkshire owns so many companies that WEB taking active roles defies common sense. Most of his CEO's rarely hear from him. They are just great businesses that stay great because he keeps the original management.
Even if you figure that Buffett's success is based on his hands on management skills, it doesn't explain the rest of the super investors. Few of those are actively involved in hands-on management. Bill Miller isn't running Amazon.
And your viewpoint that small cap exposure explains outperformance for these guys is silly. Academic studies credit small caps with an extra 1% per year or so of outperformance decades. That doesn't explain beating the market by 10-15% per year, esp. when most of the SuperInvestors long ago stopped being able to invest in small caps. Buffett for example is now limited in most cases to $10B market caps and above.
The reality is, and I think Buffett would say this as well, EMT is true most of the time. The market is usually efficient. It's difficult or impossible to trade based on "patterns", since no-one can predict which ones will continue. For most investors, index funds are the best low cost choice. Most active management fails to beat the market by more than their fees. This may not be as true with hedge funds, but it's especially true in mutual funds, which have horrible structures almost destined to trail the market.
But if you are a good value investor, investing in a private investment fund or just on your own, you can beat the market. There are mispriced securities out there. Finding them just requires patience and hard work. I know this because I've been doing it for over four years with great results.
Fama doesn't know this because he doesn't understand value investing, i.e. real investing. Fama and other EMT guys think that some stocks are "value stocks" and some "growth stocks", when in truth, all stocks are value stocks at the right price. They think you must be able to predict price action to be a successful investor, which isn't true. Fama lumps in large actively managed mutual funds that are really index funds in drag, chartists, momentum guys, brokerage firms interested more in commissions than performance, etc, when he talks about "investing". Of course the majority of those guys don't beat the market. But in the small group of intelligent Graham-Fisher type investors, there are a great many who do.
BTW, Peter Lynch was a value investor. He ranged all over looking for value, from cheap banks to cheap growth stocks, as long as they were priced as bargains in relation to their true value. When he left, his successors trailed the market for two reasons. One is they weren't as good as Peter, and didn't share the same philosophy. Second, was that Magelleon had simply gotten too large. No matter how good an investor you are, managing bigger portfolios equals worse returns. There simply aren't as many easy to find mispricings in large caps as there are in small.
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