Evaluating Managed Funds

[buffett]

Because of quotes like these...

"The reality distortion field emanating from this fund has old-school Soviet Bloc Ministers of Propoganda green with envy."
"To blame the 4th quarter rally on anything other than Wall Street bonus hunting is pollyanna....The Santa Clause rally is about bonuses and denying it is to deny water is wet."
"SuperInvestor Frontal Lobotomy...SuperInvestor babble?"

....I hope that this will be my last post in response to rock.

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Your IJR vs. SPY chart goes back all of 5 years. How about looking up the CAGR of the Russell 2000 vs. the S&P 500 for something more like 20 or 50 or more years and then getting back to us with your results?

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Maybe you could

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While not exactly what I was originally asking for, here is something (specifically, table 2 on page 16) that seems to be saying that small caps added about 1.2-1.3% annual outperformance for the years 63-99. Perhaps this answers Ed's question about small cap outperformance in regard to your claim that it might be much higher than 1-2% over the long-term.

Here's a site that says the CAGR for the S&P 500 and Rusell 2000 from 7/89-2/00 was, respectively, 17.55% and 14.12%, which is a 10.5 year period of greater than 3% underperformance by small stocks.

(Btw, I have nothing against small company stocks in general. I think they're awesome and should definitely be part of a a sensible portfolio. I'm just (1) trying to get the facts right, and (2) sounding a cautionary note after 6 consecutive years of outperformance by the R2K.)

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How do you reconcile them and other academics with all your SuperInvestor babble?

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1. Mr. Buffett explains it best in the 1984 speech in question. I don't know why it's "babble," though...is it because there are no Greek symbols in the speech?
2. OID is the periodical of choice for Graham-and-Doddsville. A great majority of the interviewees have beaten the market over many-year periods.
3. As Mr. Buffett has wryly observed, EMT is something that (paraphrasing) "works well in theory but not in practice."

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My point was that everyone is blithering on and on about FAIRX, and it hasn't even outperformed the mid-cap value index

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Right. So far. And you're free to extrapolate that out into eternity, and I'm free to believe that FAIRX will eventually win.

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To blame the 4th quarter rally on anything other than Wall Street bonus hunting is pollyanna.

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Your Bill Cara (I have no idea who this is) quote seems to contradict you: "Wall Street profit bonuses to staff will aggregate $24 billion this year. They say it’s because they have done such a wonderful job for you. Actually, the Dow 30 Industrials Average is lower today than its close Dec-31-04 (10,783). The average mutual fund and the average hedge fund has done squat for 2005 as the year comes to a close." You can believe what you want, but I think stories like this are more logical.

I wish you all the best in the market and on this forum, but I just don't see the point in two such differently-minded and stubborn people to keep going back and forth. My main reason in responding so far has not been to try to convert/proselytize you, but to stump on behalf of Graham-and-Doddsville for those who may be reading.

Frankly, though, G-a-D-style investing works best when more people believe EMT (prompting several OID people to contemplate endowing EMT Chairs at b-schools around the country), so I'm not sure why I'm bothering. It'd be a little like figuring out how to beat small stakes hold-em, and then doing something really dumb like going and writing a book about it, so now the whole world knows, and there were 3 2+2ers on my table last night, thanks to Ed "Loudmouth" Miller. [img]/images/graemlins/smile.gif[/img]

[Mark Heide]

Ed,

I have some simple criteria for picking managed funds. First, since most funds do worse than the S&P 500 index, the performance of the fund over the the past 5 years minus the management fees would have to be greater than the performance of a S&P 500 index fund plus it's management fees.

With that stated, if you feel like doing no work at all, put your money in an S&P 500 index fund.

If you like control over your money and want to work at it, I suggest creating your own diversified fund built of stocks you have researched yourself. For example, you could look at all the companies that are listed in the S&P 500 and build your own list of funds from that group.

Good Luck

Mark

[Sniper]

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Frankly, though, G-a-D-style investing works best when more people believe EMT (prompting several OID people to contemplate endowing EMT Chairs at b-schools around the country), so I'm not sure why I'm bothering. It'd be a little like figuring out how to beat small stakes hold-em, and then doing something really dumb like going and writing a book about it, so now the whole world knows, and there were 3 2+2ers on my table last night, thanks to Ed "Loudmouth" Miller.


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Buf, I know there's a gem in here...but my sarcasm detector must be broken...

[DavidC]

Um, I've seldom done investing, but here's what I'm seeing, Ed:

You want to purchase a managed fund that is being managed in a manner that you see as rational (that owns one of your stock). You're essentially looking for a manager that agrees with you, and thus, you're managing your own funds, while paying someone else to pretend to do it.

The only reason to do this would be to let someone else decide when to pull the plug on your favoured stock (i.e. they own it currently so hopefully they'll sell it when it's no longer attractive, and thus, so will you).

Anyways, here's what I see as your ideal solution, given taht you want to own managed funds as well as a given stock.

Buy a managed fund from a well-respected company that you like. Buy the stock with separate money that you manage.

[DavidC]

Isn't Sequoia closed to new investment now?

By the way, thanks for the post, Buffet! [img]/images/graemlins/smile.gif[/img]

[buffett]

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Isn't Sequoia closed to new investment now?

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Yeah, Sequoia fits the former of the following two choices: "But most of these are either closed to new investors or just plain huge...."

[buffett]

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my sarcasm detector must be broken

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I don't get what you don't get....
In the same way that it would be easier to win at poker without all these 2+2ers running around, in general investing success becomes easier when fewer people are out there looking for (the limited supply of) undervalued stocks.

[rockrock]

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My point was that small/value tilt in portfolio can explain a lot more than the 1-2% cited.

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My question was by how many percentage points.

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Well if you look at the link to the chart you'll see it's double digits.

This SuperInvestor stuff is such non-sense. Warren Buffet is an investor. The rest of us just trade shares of companies. Big difference.

If you are rhetorically asking me to pull out my crystal ball, then all I can direct you to is Fama and French.

[rockrock]

Buffet,

The babble I was referring to was coming from you. Warren Buffet is an investor that buys businesses and actively participates in their management.

You and I and everyone else in this forum trade shares of companies when we participate in capital markets. You, me and Ed are not "investors" and no matter how many times we say it, it won't be true.

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Frankly, though, G-a-D-style investing works best when more people believe EMT (prompting several OID people to contemplate endowing EMT Chairs at b-schools around the country), so I'm not sure why I'm bothering.

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This is quite the paradox, since indexing works best when know-it-alls from Wharton and other top B-Schools become entrenched firmly in sell-side Wall Street brokerage research firms, brokerage houses, mutual funds and the like; working to make the market even more effecient.

So maybe indexers are the ones that should shut up and encourage everyone to do their "homework".

I am not sure how I contradict Bill Cara and will lightning strike if you acknowledge Fama and French or is it merely a fireable offense?

Frankly, the evidence that actively managed mutual funds are -EV is so overwhelming I can't believe anyone would argue otherwise.

Here is an interesting interview with Fama

Here are some gems that aren't really 3 factor related, but about EMT and active managment.

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The analyst believes he knows something, or infers something, that other analysts don't see. He sees an evolution taking place or he believes this company is doing better than people think, and that's why he gets paid millions of dollars on Wall Street to pick stocks. What's wrong with this thesis?

Well, not everybody can have that talent. In fact, as far as I can tell, not many do. The system is designed to make that very difficult. By that, I mean that under US accounting [and regulatory] systems, if you reveal anything, you have to reveal it to everybody.

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The efficient market theory and the random walk theory aren't the same thing. The efficient market theory is much more powerful than the random walk theory, which merely postulates that the future price movements can't be predicted from past price movements alone. One extreme version of the efficient market theory says, not only is the market continually adjusting all prices to reflect new information but, for whatever reason, the expected returns—the returns investors require to hold stocks—are constant through time. [For example, we know that, since the '20s, returns on the New York Stock Exchange common stocks have averaged a little over 10% per year.] I don't believe that. Economically, there is no reason why the expected return on the stock market has to be the same through time. It could be higher in bad times if people become more risk-averse; it could be lower in good times when people become less risk-averse.

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One thing I did a couple of years back was take all the funds that survived from the beginning of the Morningstar tapes, which is 1976. Now, funds that survive that long will have survivor bias built into the test, because only the successful funds survive. So I split the sample period in half and took the 20 biggest winners of the first 10 years, or the first half of the period, and I asked how did they do in the second half of the period. Well, in the second half of the period, half of them were up and half of them were down.

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For the most part, I think it is luck. The evidence is pretty strong that active management doesn't really do better than passive management.

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[DavidC]

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The only reason to do this would be to let someone else decide when to pull the plug on your favoured stock (i.e. they own it currently so hopefully they'll sell it when it's no longer attractive, and thus, so will you).


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On a walk with AdamL tonight, he pointed out that this may not be a wise idea, since mutual funds have a harder time getting rid of a position than a regular investor.

Also, it came up that mutual funds (this may be wrong) require cash holdings in order to maintain liquidity for sellers of the fund. This is a cost in addition to the MER that you have to take into consideration.

--Dave.