Stricktly +EV for a Young Investor

[adios]

[ QUOTE ]
[ QUOTE ]
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.

[/ QUOTE ]

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.

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

[/ QUOTE ]

...and work.

[ QUOTE ]

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

[/ QUOTE ]

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

thanks,
Barron

[/ QUOTE ]

Here's a way to beat the market.

SSO - Ultra S&P 500

The Ultra S&P500 seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the S&P 500® Index

If the market's "guaranteed" (equity risk premium) to be up over a 20 year holding period, then obviously this will do better. It's an ETF that's highly liquid for most on this forum I suspect.

[PRE]

[ QUOTE ]
[ QUOTE ]
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.

[/ QUOTE ]

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.

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

[/ QUOTE ]

...and work.

[ QUOTE ]

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

[/ QUOTE ]

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

thanks,
Barron

[/ QUOTE ]

I'll respond to your earlier post regarding my first point later tonight when I have some time. But I agree with what you said in this post. I was referring to investment managers/professionals with my 2nd point. It is generally a waste of time for people not in this profession to research on their own (unless they feel it's enjoyable). I think it would be fair to say that an average investor has little chance of beating professionals due to the time involved (professionals spend upwards of 55-80 hours a week trying to beat an index by a few basis points).

Edit: Barron, if you have time check out the book Black Swan by Taleb.

[DcifrThs]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
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.

[/ QUOTE ]

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.

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

[/ QUOTE ]

...and work.

[ QUOTE ]

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

[/ QUOTE ]

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

thanks,
Barron

[/ QUOTE ]

I'll respond to your earlier post regarding my first point later tonight when I have some time. But I agree with what you said in this post. I was referring to investment managers/professionals with my 2nd point. It is generally a waste of time for people not in this profession to research on their own (unless they feel it's enjoyable). I think it would be fair to say that an average investor has little chance of beating professionals due to the time involved (professionals spend upwards of 55-80 hours a week trying to beat an index by a few basis points).

Edit: Barron, if you have time check out the book Black Swan by Taleb.

[/ QUOTE ]

thats one of my favorite introductory books. taleb introduced me to mandelbrot who is by far more qualified to deal with financial market theory than talebt is.

also, i've started reading up on poincare thanks to taleb. NNT is a great writer and i have enjoyed his works.

was there something in particular from those books (or TBS ) that you thought was specifically germane to this discussion?

thanks,
Barron

[Fishhead24]

Books are usually outdated........read forums such as these.

[DcifrThs]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
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.

[/ QUOTE ]

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.

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

[/ QUOTE ]

...and work.

[ QUOTE ]

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

[/ QUOTE ]

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

thanks,
Barron

[/ QUOTE ]

Here's a way to beat the market.

SSO - Ultra S&P 500

The Ultra S&P500 seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the S&P 500® Index

If the market's "guaranteed" (equity risk premium) to be up over a 20 year holding period, then obviously this will do better. It's an ETF that's highly liquid for most on this forum I suspect.

[/ QUOTE ]

as long as you understand that in addition to your ERP, you're also getting 2x the risk. you've taken a .25 sharpe ratio asset class and simply levered it 2:1. having an investment with an expected return of 16% with an expected standard deviation of upwards of 50% can wreak havok on your returns and may be less efficient from a portfolio standpoint despite the higher returns. the problem is that downswings hurt more and you've increased your portfolio's risk allocation to equities by a ton.

i'd rather use leverage via ETFs to double the US2yr bond return or the lehman global agg bond fund, or (the best) get serious leverage on US TIPS or a global TIPS fund. that would be some really useful leverage.

that way, if you really want to hit a 16% return target, you can construct a .5 sharpe ratio portfolio and lever it to a 32% risk target (this will take a large amount of leverage btw...it's doable though).

just some thoughts on the subject...

Barron

EDIT: you say "here is a way to beat the market", well that doesn't make sense to me because you are not beating the market. you are doubling your exposure to the market. what is the difference between investing in that 2x S&P500 ETF with $1k or taking $1k, buying S&P500 shares, repo'ing them and buying another set of (~$980 worth of ) S&P500 shares??

aside from costs and the type of leverage used, these strategies are basically the same, all you've done is increased exposure. you havent "beat" the market in the sense of "outperforming" imo since performance indicates that you've made choices to alter your portfolio to a degree that it is different than the "market" via research. here you haven't done that at all.

[mtgordon]

First let me state that I am by no means an expert and probably more towards the newb side of things. However, I'm wondering why people on this board don't recommend more leveraging. Isn't that a way to increase your EV? I understand that the risk goes up as well, but if there were ever people that should be able to understand/cope with that it should be professional gamblers.

We would certainly suggest raising a draw for value even though it would increase the variance. As long as the game continues long enough things will equal out and +EV decisions will yield higher returns.

[DcifrThs]

[ QUOTE ]
First let me state that I am by no means an expert and probably more towards the newb side of things. However, I'm wondering why people on this board don't recommend more leveraging. Isn't that a way to increase your EV? I understand that the risk goes up as well, but if there were ever people that should be able to understand/cope with that it should be professional gamblers.

We would certainly suggest raising a draw for value even though it would increase the variance. As long as the game continues long enough things will equal out and +EV decisions will yield higher returns.

[/ QUOTE ]

well i know i've personally stressed intelligent leverage for portfolio construction every chance i get.

maybe nobody wants to listen [img]/images/graemlins/frown.gif[/img]

for maximizing your sharpe ratio (risk adjusted returns) you NEED leverage to bring the low risk/return asset classes like IL bonds, short duration nominal bonds etc. AND you need to deleverage other allocations like REITs and commodities (the latter is readily available via CCFs).

in this way, you maximize the diversification benefits without sacrificing the returns on those diversified allocations.

once you have your maximized expected sharpe ratio, you can then lever up or down your entire portfolio to hit the risk/return target you desire. i know i've been sayin this for a while...

in terms of active management (which you seem to be talkign about more specifically) leverage is very important as well, so long as it is taken in an intelligent manner.

Barron

[maxtower]

I don't understand this. If it is supposed to double the return why after 12 months, where the S&P has made gains, are these two up only about the same?
Link

[mtgordon]

Can you leverage with ETFs and passive management? I don't mean to beat this like dead horse, but I don't know a lot of the words you used (mainly just sharpe ratio) nor how to 'lever up or down'. Should I make this a new thread or is this enough about +EV to keep this here?

PS: I looked up Sharpe Ratio and kind of understand it and then looked it up for the index funds I have but still have no idea where to go next.

[MarkD]

[ QUOTE ]
[ QUOTE ]
First let me state that I am by no means an expert and probably more towards the newb side of things. However, I'm wondering why people on this board don't recommend more leveraging. Isn't that a way to increase your EV? I understand that the risk goes up as well, but if there were ever people that should be able to understand/cope with that it should be professional gamblers.

We would certainly suggest raising a draw for value even though it would increase the variance. As long as the game continues long enough things will equal out and +EV decisions will yield higher returns.

[/ QUOTE ]

well i know i've personally stressed intelligent leverage for portfolio construction every chance i get.

maybe nobody wants to listen [img]/images/graemlins/frown.gif[/img]

for maximizing your sharpe ratio (risk adjusted returns) you NEED leverage to bring the low risk/return asset classes like IL bonds, short duration nominal bonds etc. AND you need to deleverage other allocations like REITs and commodities (the latter is readily available via CCFs).

in this way, you maximize the diversification benefits without sacrificing the returns on those diversified allocations.

once you have your maximized expected sharpe ratio, you can then lever up or down your entire portfolio to hit the risk/return target you desire. i know i've been sayin this for a while...

in terms of active management (which you seem to be talkign about more specifically) leverage is very important as well, so long as it is taken in an intelligent manner.

Barron

[/ QUOTE ]

Barron,

I've read quite a few posts of yours on here. I wish I understood them.

Could you write a post on how the average person (me) should construct his portfolio in the manner you suggest, but write it in a way that I might actually understand?

Alpha, beta, sharpe ratios = wtf?