Stricktly +EV for a Young Investor

[T50_Omaha8]

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It's always funny to read people discuss complicated investment concepts on here and then stumble through the most remedial discussions imaginable on basic investing.

The higher the "EV" or expected return of an investment, the higher the degree of risk. If you have some extraordinary ability to evaluate expected return and risk more accurately than the market, good for you. You're one of extremely few.

For all of us mortals, investing in an index--a portfolio with a huge array of stocks of a relatively high risk level-- is about the best we can do; we maximize return while minimizing risk for that level of return. Mutual funds are a lot like indexes--they're still only buying the same stocks with publicly available information--and they have a rake. It turns out the casual investor very rarely overcomes this rake. Therefore, indexes appear to be the better buy.

Any of your own research you sit and do from your computer will be essentially worthless. You won't gain anything, and you won't lose anything. Your expected return will be exactly the same.

And none of us has the ability to take advantage of derivative premium arbitrage. The cost for an ordinary person to make such investments exceeds whatever (negligible) return bonus you could ever get many times over.

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Does Bill Miller have a secret machine that the rest of us mortals aren't exposed to?

[/ QUOTE ]Review the bolded section.

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It's always funny to read people discuss complicated investment concepts on here and then stumble through the most remedial discussions imaginable on basic investing.

The higher the "EV" or expected return of an investment, the higher the degree of risk. If you have some extraordinary ability to evaluate expected return and risk more accurately than the market, good for you. You're one of extremely few.

For all of us mortals, investing in an index--a portfolio with a huge array of stocks of a relatively high risk level-- is about the best we can do; we maximize return while minimizing risk for that level of return. Mutual funds are a lot like indexes--they're still only buying the same stocks with publicly available information--and they have a rake. It turns out the casual investor very rarely overcomes this rake. Therefore, indexes appear to be the better buy.

Any of your own research you sit and do from your computer will be essentially worthless. You won't gain anything, and you won't lose anything. Your expected return will be exactly the same.

And none of us has the ability to take advantage of derivative premium arbitrage. The cost for an ordinary person to make such investments exceeds whatever (negligible) return bonus you could ever get many times over.

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Does Bill Miller have a secret machine that the rest of us mortals aren't exposed to?

[/ QUOTE ]Review the bolded section.

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Warren Buffet doesn't own a computer.

[T50_Omaha8]

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It's always funny to read people discuss complicated investment concepts on here and then stumble through the most remedial discussions imaginable on basic investing.

The higher the "EV" or expected return of an investment, the higher the degree of risk. If you have some extraordinary ability to evaluate expected return and risk more accurately than the market, good for you. You're one of extremely few.

For all of us mortals, investing in an index--a portfolio with a huge array of stocks of a relatively high risk level-- is about the best we can do; we maximize return while minimizing risk for that level of return. Mutual funds are a lot like indexes--they're still only buying the same stocks with publicly available information--and they have a rake. It turns out the casual investor very rarely overcomes this rake. Therefore, indexes appear to be the better buy.

Any of your own research you sit and do from your computer will be essentially worthless. You won't gain anything, and you won't lose anything. Your expected return will be exactly the same.

And none of us has the ability to take advantage of derivative premium arbitrage. The cost for an ordinary person to make such investments exceeds whatever (negligible) return bonus you could ever get many times over.

[/ QUOTE ]

Does Bill Miller have a secret machine that the rest of us mortals aren't exposed to?

[/ QUOTE ]Review the bolded section.

[/ QUOTE ]

Warren Buffet doesn't own a computer.

[/ QUOTE ]Nonetheless, I'm pretty sure he can distinguish between the words "few" and "none."

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It's always funny to read people discuss complicated investment concepts on here and then stumble through the most remedial discussions imaginable on basic investing.

The higher the "EV" or expected return of an investment, the higher the degree of risk. If you have some extraordinary ability to evaluate expected return and risk more accurately than the market, good for you. You're one of extremely few.

For all of us mortals, investing in an index--a portfolio with a huge array of stocks of a relatively high risk level-- is about the best we can do; we maximize return while minimizing risk for that level of return. Mutual funds are a lot like indexes--they're still only buying the same stocks with publicly available information--and they have a rake. It turns out the casual investor very rarely overcomes this rake. Therefore, indexes appear to be the better buy.

Any of your own research you sit and do from your computer will be essentially worthless. You won't gain anything, and you won't lose anything. Your expected return will be exactly the same.

And none of us has the ability to take advantage of derivative premium arbitrage. The cost for an ordinary person to make such investments exceeds whatever (negligible) return bonus you could ever get many times over.

[/ QUOTE ]

Does Bill Miller have a secret machine that the rest of us mortals aren't exposed to?

[/ QUOTE ]Review the bolded section.

[/ QUOTE ]

Warren Buffet doesn't own a computer.

[/ QUOTE ]Nonetheless, I'm pretty sure he can distinguish between the words "few" and "none."

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I agree with you that few investors can beat the market. I think your other point was that you need more than a computer to do this? That's what I'm disagreeing with. It seems like a pretty ignorant comment on your part, so I think it's more of a case of me misunderstanding you rather than you believing that.

[T50_Omaha8]

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I agree with you that few investors can beat the market. I think your other point was that you need more than a computer to do this? That's what I'm disagreeing with. It seems like a pretty ignorant comment on your part, so I think it's more of a case of me misunderstanding you rather than you believing that.

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Is this the phrase you take issue with? [ QUOTE ]
If you have some extraordinary ability to evaluate expected return and risk more accurately than the market, good for you.

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I'm not sure I imply that computers are at all necessary to do well in the stock market. Someone could have easily said what I said in 1925, although it would have been less true then.

Or do you take issue with this: [ QUOTE ]
Any of your own research you sit and do from your computer will be essentially worthless. You won't gain anything, and you won't lose anything. Your expected return will be exactly the same.

[/ QUOTE ] This is like saying "any amount of research you do on your computer to solve an unproven topology theorem will be pretty much worthless." You've got to be absurdly talented to have any chance. If someone isn't smart enough to beat the market, they'll sit there all day and look at information other people already know and get nothing out of it, besides a wealth of information that has already been reflected in market prices.

The normal investor who doesn't have take time or effort, or the necessary insight or talent, is much MUCH better off just investing in indexes and letting the cut-throat investors determine market prices once you consider the value of time and effort.

If you enjoy choosing stocks carefully and think you might have a very small edge or some insight that isn't reflected in market prices, then by all means, study away.

If it was the last statement about arbitrage, well, you quite frankly DO need a computer to take substantial advantage of arbitrage opportunities in any sort of developed-world exchange.

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I agree with you that few investors can beat the market. I think your other point was that you need more than a computer to do this? That's what I'm disagreeing with. It seems like a pretty ignorant comment on your part, so I think it's more of a case of me misunderstanding you rather than you believing that.

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Is this the phrase you take issue with? [ QUOTE ]
If you have some extraordinary ability to evaluate expected return and risk more accurately than the market, good for you.

[/ QUOTE ]
I'm not sure I imply that computers are at all necessary to do well in the stock market. Someone could have easily said what I said in 1925, although it would have been less true then.

Or do you take issue with this: [ QUOTE ]
Any of your own research you sit and do from your computer will be essentially worthless. You won't gain anything, and you won't lose anything. Your expected return will be exactly the same.

[/ QUOTE ] This is like saying "any amount of research you do on your computer to solve an unproven topology theorem will be pretty much worthless." You've got to be absurdly talented to have any chance. If someone isn't smart enough to beat the market, they'll sit there all day and look at information other people already know and get nothing out of it, besides a wealth of information that has already been reflected in market prices.

The normal investor who doesn't have take time or effort, or the necessary insight or talent, is much MUCH better off just investing in indexes and letting the cut-throat investors determine market prices once you consider the value of time and effort.

If you enjoy choosing stocks carefully and think you might have a very small edge or some insight that isn't reflected in market prices, then by all means, study away.

If it was the last statement about arbitrage, well, you quite frankly DO need a computer to take substantial advantage of arbitrage opportunities in any sort of developed-world exchange.

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I disagreed with your second point regarding one needing to be extremely talented to beat the market only because of the way it was initially stated. I agree with your revised comments. A couple last thoughts:

1. Too many people feel all actively managed are bad since, on average, they don’t beat the market. Whenever someone on this forum asks for advice about investing some money, the immediate response is index funds. If someone puts some work into this (and an absurd amount isn’t necessary here), he can find a fund that, after fees, is expected to beat the market over a long timeframe. I’m planning on making an informative post regarding this because it’s lacking here big time. The key is focusing on newer funds with 3-5 year track records that are trying very hard to acquire additional money and, as a result, their fees will likely be bearable. An additional benefit is the fact that smaller stocks can still have a positive impact on its returns.

2. You don’t need to be brilliant to beat the market (even after fees). I agree that you need to put a ton of work and research into it, but to say only geniuses can beat the market is absurd. The biggest reason why the average investor (assuming he has average intelligence) fails to beat the market is a lack of patience. There was a post a week or two ago regarding how important the behavioral impacts of investing are and truer words were never spoken.

[kyleb]

Just put your money in index funds. Don't listen to anyone else.

[mtgordon]

I concur

[DcifrThs]

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1. Too many people feel all actively managed are bad since, on average, they don’t beat the market. Whenever someone on this forum asks for advice about investing some money, the immediate response is index funds. If someone puts some work into this (and an absurd amount isn’t necessary here), he can find a fund that, after fees, is expected to beat the market over a long timeframe. I’m planning on making an informative post regarding this because it’s lacking here big time. The key is focusing on newer funds with 3-5 year track records that are trying very hard to acquire additional money and, as a result, their fees will likely be bearable. An additional benefit is the fact that smaller stocks can still have a positive impact on its returns.

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it seems that there are some logical issues with your statement here.

first, [elsewhere] you state that it is important to find funds with strong track records over long periods of time. i think 3-5 years isn't a long enough period of time in this space so finding new funds with long track records and low fees seems logically inconsistant. those funds who have strong track records have an incentive to charge more fees since this is the method most readily used by investors to choose among funds.

the qualification bolded above makes it seem like you want to choose a fund or select few funds and park your money with them over time (i.e. for a long time). but your advice regarding finding a new fund where an additional benefit is that small cap stocks are still a viable ivnestment strategy doesn't jive with the long term parking of money. as those funds acquire more capital (and if you chose to put your money in that new fund, it stands to reason that others will), the availability of the smaller cap stocks that have had a positive influence on returns (on which you based your selection) will diminish. you will therefore not be able to park your money there for too long and expect the same performance.

on that note, how can you control for the changing investment constraints of your selected "new" managers over time? you have chosen them based on their previous record, and, since they are still in the "trying to attract capital" phase, it stands to reason that their performance prior to your investment, and their performance for the next n years will be different solely based on the amount of capital invested in that fund or set of funds.

how can you tell a priori whether a manager with XAUM where X allows for small cap investments will be similarly able to beat the market with YAUM where Y>X and no longer allows for small cap investments?

this question can then be generalized to not only small cap investments but individual contribution to alpha generation (i.e. if the main guy at a fund or main group of guys at a fund are your reason for investing (or a strong one), then your choice is tied to them and if they leave, you then have to look for funds again) and other similar manager selection issues.

you are then in a situation where you need to re-adjust your allocations.

i await your post on the subject.

it seems to me that a well constructed diversified passive portfolio will outperform any combination of managed equity funds and be easier to construct and manage over time. thus, time would be far better spent constructing and managing a completely passive portfolio for almost every investor rather than going through the managed fund universe to eek out a very volatile and highly uncertain alpha.

you have also not dealt with the degree to which a fund beats the market and teh variability of that degree over time.

anyways, i'll comment more as this discussion progresses.

thanks,
Barron

[DcifrThs]

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2. You don’t need to be brilliant to beat the market (even after fees). I agree that you need to put a ton of work and research into it, but to say only geniuses can beat the market is absurd.

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this is my problem with the manager selection/stock market beating issue. by how much can you be expected to beat the market? and how much additional work is required for that gain? what is the risk adjusted return you expect to generate over time and for how long will you need to do that work to generate those returns?

i don't think (with my current level of knowledge and research on the subject) that the trade off is worth it.

your time can be better spent, and more highly rewarded elsewhere.

alpha is zero sum and hard to find.

anyways, as to your initial point, i certainly agree. stating that only geniuses can beat the market is indeed absurd.

i can prove this by assigning the market to mean either the S&P500 or some other composite market cap weighted index of stocks. if you can work your ass off and identify 1 likely underperformer, you can beat the market. that strategy doesn't take a genius, just a lot of work for mininal excess return.

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The biggest reason why the average investor (assuming he has average intelligence) fails to beat the market is a lack of patience.

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...and work.

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There was a post a week or two ago regarding how important the behavioral impacts of investing are and truer words were never spoken.

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can you link that post? i have a vague memory of it and would like to re-read for this discussion.

thanks,
Barron