Difficulty of Outperforming

[ScottHall]

The easiest way to outperform is to buy an index fund. You'll outperform 90%+ of other investors.

 

You should probably ask why you want to outperform, anyway. Is being a multi-millionaire at retirement not enough for you, or is it the thrill of the hunt? I understand the thrill of the hunt. Not being satisfied with only being in the lowest caste of rich people is kind of silly.

[giofranchi]

You should probably ask why you want to outperform, anyway. Is being a multi-millionaire at retirement not enough for you, or is it the thrill of the hunt? I understand the thrill of the hunt. Not being satisfied with only being in the lowest caste of rich people is kind of silly.

 

Buying a selection of companies, instead, forces you to think about business. And there are at least two reasons why I believe that thinking about business might be useful:

1) It helps you manage your own business much more effectively;

2) It is great fun! ;)

 

Cheers,

 

Gio

 

[Uccmal]

The easiest way to outperform is to buy an index fund. You'll outperform 90%+ of other investors.

 

You should probably ask why you want to outperform, anyway. Is being a multi-millionaire at retirement not enough for you, or is it the thrill of the hunt? I understand the thrill of the hunt. Not being satisfied with only being in the lowest caste of rich people is kind of silly.

 

Or an index fund with leverage over time... i.e. no buying and selling, forced or otherwise. 

 

I wasn't really after the philosophy... being extremely rich the day before I die has no appeal to me.  I already have enough for my famiky to live well enough on.

 

I was more questioning why people follow gurus when so very few outperform the major indexes after fees, and taxes, over time.  I keep using the wording " so very few", because it is exceedingly rare.  Since I started at this about 20 years ago, I have seen manager after manager revert to the mean or worse, by balancing their outperformance early on with serious underperformance later. 

 

Not saying its luck, just that its uncommon even among "gurus". 

[Guest longinvestor]

The easiest way to outperform is to buy an index fund. You'll outperform 90%+ of other investors.

 

You should probably ask why you want to outperform, anyway. Is being a multi-millionaire at retirement not enough for you, or is it the thrill of the hunt? I understand the thrill of the hunt. Not being satisfied with only being in the lowest caste of rich people is kind of silly.

 

Actually, I would like to know what's in the investing minds of those who are not aspiring to become a multi-millionaire. Those that already are. What are they looking for? Out performance? Legacy? P%^&s envy? Something else? If they rightfully chose capital preservation, they'd be the mostly correct by indexing. What they do instead is to hire a helper with expensive taste of course. 

 

[Jurgis]

The easiest way to outperform is to buy an index fund. You'll outperform 90%+ of other investors.

 

You should probably ask why you want to outperform, anyway. Is being a multi-millionaire at retirement not enough for you,

 

OT, but I'll answer:

 

1. Fear. Fear that the index will go sideways or down for a long time and you actually won't reach your targets before retirement.

2. Time. Reaching your goal @50 is better than reaching your goal @70.

3. Goal inflation. I know you said vague "multi-millionaire", but it does matter if you have $1M or $2M or $10M @70. With $1M there is a risk that it won't be enough if you calculate medical expenses and long term care and longevity. Even more so if your portfolio gives crap returns from there.

4. Convenience. Like Buffett, I believe that private jet travel is great. This won't work if you have $1M, but will work if you have >$10M. (Yes, like Buffett, I'll call this "Indefensible". But you asked for reasons and it's a reason  8) ).

[randomep]

Just saw an article on my phone's bloomberg app. The top 20 hedge funds have earned 1/2 of the $385b in total hedge profits.  Since inception:

 

BridgeWater: 45b (1975)

Quantum: 42.8b (73)

Appaloosa: 22.8 (93)

Baupost: 22.6 (83)

Viking: 22.5 (99)

Lone Pine 22.4 (96)

Paulson &co: 21.4 (94)

SAC: 19.7 (92)

Elliot Assoc.: 18.5 (77)

Moore Capital: 18.1 (90)

.......

 

Pershing Square was kicked off the list last year.........

 

yup the majority of funds lose, as I believe the majority of companies

 

 

 

[AzCactus]

I don't think anyone said it was easy to outperform.  I also think that if Horsehead hadn't gone broke this thread likely would not have come up. 

[Jurgis]

I also think that if Horsehead hadn't gone broke this thread likely would not have come up.

 

Why not? I've been harping about famous managers underperforming in various places for quite a time. Einhorn. Loeb. Ackman.

 

So Uccmal opened a thread based on Pabrai, but really that's just yet another example .

 

Edit: if you are looking something to blame for the thread, blame SP500 runup from 2009. :P

[AzCactus]

I also think that if Horsehead hadn't gone broke this thread likely would not have come up.

 

Why not? I've been harping about famous managers underperforming in various places for quite a time. Einhorn. Loeb. Ackman.

 

So Uccmal opened a thread based on Pabrai, but really that's just yet another example .

 

Edit: if you are looking something to blame for the thread, blame SP500 runup from 2009. :P

 

Jurgis,

 

I don't disagree at all.  I'm just saying there's not a lot new about most people underperforming especially when you are charging 2 and 20.  I would say when you factor in emotions upwards of 98% of people if not more would be better in an index fund. 

[Cardboard]

I think what is "killing" these fund managers who have been long term outperformers can be summarized as follows:

 

1- Size: Outperformance attracts too much capital at exactly the wrong time (contributions and asset returns).

2- Concentration: Normally helps returns but, one mistake and you are really in trouble.

3- Complacency: Once you start to think it is easy, you are really prone to make mistakes. That is really when you should fear.

4- Lack of flexibility: If you can buy anything, your chances to find bargains increase even when asset prices tend to be high. Some pockets can be depressed. You have to keep hunting.

5- Not being hungry enough: Young fund managers will sacrifice everything to get returns. Once you are wealthy, you will want to enjoy life and will turn fewer rocks or you may have people working for you not doing it as well as you or not as effective.

 

By the way, you don't have to be a fund manager for this to happen to you. I had done 25 to 30% a year for 15 years only to be down now over 50% from the peak. So I have lived it fully over the past 1 1/2 years. The return to the basics has been hard. I guess that I will see the peak again someday but, my long term outperformance has taken a massive hit.

 

Now, I can only imagine if I had redemptions and a team working for me to deal with on how harder it would have been.

 

Regarding how much money one truly needs. If you have developed some talent to do stock picking and finding good investments, then I think it is your duty to continue and try to put it to good use in the end for society. It is also fun to have success and being right once in a while. Greatest satisfaction IMO and worth more than all the toys and gadgets from wealth.

 

If you have maxed out your abilities and/or need more time in your life, then yes indexing would make sense.

 

Cardboard

 

 

[frommi]

The easiest way to outperform is to buy an index fund. You'll outperform 90%+ of other investors.

 

You should probably ask why you want to outperform, anyway. Is being a multi-millionaire at retirement not enough for you, or is it the thrill of the hunt? I understand the thrill of the hunt. Not being satisfied with only being in the lowest caste of rich people is kind of silly.

 

Maybe because it stimulates the mind and you learn more every day. Pure index investing is to boring for me to work as an investment strategy. And being a multi millionaire only in retirement is a bit late, life is short. :)

[fareastwarriors]

Just saw an article on my phone's bloomberg app. The top 20 hedge funds have earned 1/2 of the $385b in total hedge profits.  Since inception:

 

BridgeWater: 45b (1975)

Quantum: 42.8b (73)

Appaloosa: 22.8 (93)

Baupost: 22.6 (83)

Viking: 22.5 (99)

Lone Pine 22.4 (96)

Paulson &co: 21.4 (94)

SAC: 19.7 (92)

Elliot Assoc.: 18.5 (77)

Moore Capital: 18.1 (90)

.......

 

Pershing Square was kicked off the list last year.........

 

yup the majority of funds lose, as I believe the majority of companies

 

 

http://www.bloomberg.com/news/articles/2016-01-26/bridgewater-s-dalio-trumps-soros-as-most-profitable-hedge-fund

[Jurgis]

to put it to good use in the end for society

 

Another good reason.

[Guest longinvestor]

Just saw an article on my phone's bloomberg app. The top 20 hedge funds have earned 1/2 of the $385b in total hedge profits.  Since inception:

 

BridgeWater: 45b (1975)

Quantum: 42.8b (73)

Appaloosa: 22.8 (93)

Baupost: 22.6 (83)

Viking: 22.5 (99)

Lone Pine 22.4 (96)

Paulson &co: 21.4 (94)

SAC: 19.7 (92)

Elliot Assoc.: 18.5 (77)

Moore Capital: 18.1 (90)

.......

 

Pershing Square was kicked off the list last year.........

 

yup the majority of funds lose, as I believe the majority of companies

 

 

http://www.bloomberg.com/news/articles/2016-01-26/bridgewater-s-dalio-trumps-soros-as-most-profitable-hedge-fund

 

? on these net gain numbers. Bridgewater for example, $45B on how much capital? If someone invested $10,000 in 1975 and left it there, what would it be now?

[Jurgis]

Just saw an article on my phone's bloomberg app. The top 20 hedge funds have earned 1/2 of the $385b in total hedge profits.  Since inception:

 

BridgeWater: 45b (1975)

Quantum: 42.8b (73)

Appaloosa: 22.8 (93)

Baupost: 22.6 (83)

Viking: 22.5 (99)

Lone Pine 22.4 (96)

Paulson &co: 21.4 (94)

SAC: 19.7 (92)

Elliot Assoc.: 18.5 (77)

Moore Capital: 18.1 (90)

.......

 

Pershing Square was kicked off the list last year.........

 

yup the majority of funds lose, as I believe the majority of companies

 

 

http://www.bloomberg.com/news/articles/2016-01-26/bridgewater-s-dalio-trumps-soros-as-most-profitable-hedge-fund

 

? on these net gain numbers. Bridgewater for example, $45B on how much capital? If someone invested $10,000 in 1975 and left it there, what would it be now?

 

Yeah, these numbers don't seem to be useful to determine (out)performance.

[schin]

Is anyone surprised that Jim Simon's Renaissance Hedge Fund is not there?

[fareastwarriors]

Just saw an article on my phone's bloomberg app. The top 20 hedge funds have earned 1/2 of the $385b in total hedge profits.  Since inception:

 

BridgeWater: 45b (1975)

Quantum: 42.8b (73)

Appaloosa: 22.8 (93)

Baupost: 22.6 (83)

Viking: 22.5 (99)

Lone Pine 22.4 (96)

Paulson &co: 21.4 (94)

SAC: 19.7 (92)

Elliot Assoc.: 18.5 (77)

Moore Capital: 18.1 (90)

.......

 

Pershing Square was kicked off the list last year.........

 

yup the majority of funds lose, as I believe the majority of companies

 

 

http://www.bloomberg.com/news/articles/2016-01-26/bridgewater-s-dalio-trumps-soros-as-most-profitable-hedge-fund

 

? on these net gain numbers. Bridgewater for example, $45B on how much capital? If someone invested $10,000 in 1975 and left it there, what would it be now?

 

Yeah, these numbers don't seem to be useful to determine (out)performance.

 

Yup. The article is not helpful. Maybe if we could get the LCH's backup data, we can understand it better. But even then there are still all the other factors mentioned by posters to consider.

[Jurgis]

Is anyone surprised that Jim Simon's Renaissance Hedge Fund is not there?

 

AFAIK, it does not take outside money, probably does not publish results, etc.

 

To be more precise, they have some offshoots that are still open to outside investors, but these might not have long record - who knows.

[randomep]

Is anyone surprised that Jim Simon's Renaissance Hedge Fund is not there?

 

I didn't notice but now that you mention it yes I am surprised, but then again, you have to take any hedge fund statistics with a grain of salt........

[AzCactus]

When I think of outperformance the thing that comes to my mind is sports.  If you think of outperformance in the NBA points per game might be an interesting area to start.  My guess is that hundreds of players over the years have averaged more than 25 points per game for a season, however only 13 have done so over their career.  With sports there's a physical element of course but the point is really the same---being much better than average over a long period of time is very hard. 

[randomep]

I don't think anyone said it was easy to outperform.  I also think that if Horsehead hadn't gone broke this thread likely would not have come up.

 

Why don't you ask Uccmal via private message?

 

 

[schin]

When I think of outperformance the thing that comes to my mind is sports.  If you think of outperformance in the NBA points per game might be an interesting area to start.  My guess is that hundreds of players over the years have averaged more than 25 points per game for a season, however only 13 have done so over their career.  With sports there's a physical element of course but the point is really the same---being much better than average over a long period of time is very hard.

 

The physical element is big in sports. But, for hedge funds, intelligence is accretive.... like what Charlie says about Warren.. but, I think assets under management is the killer in money management vs physical degradation.

[AzCactus]

When I think of outperformance the thing that comes to my mind is sports.  If you think of outperformance in the NBA points per game might be an interesting area to start.  My guess is that hundreds of players over the years have averaged more than 25 points per game for a season, however only 13 have done so over their career.  With sports there's a physical element of course but the point is really the same---being much better than average over a long period of time is very hard.

 

The physical element is big in sports. But, for hedge funds, intelligence is accretive.... like what Charlie says about Warren.. but, I think assets under management is the killer in money management vs physical degradation.

 

Absolutely correct.  However, I do think those 13 athletes may have something that the others dont

[Uccmal]

I don't think anyone said it was easy to outperform.  I also think that if Horsehead hadn't gone broke this thread likely would not have come up.

 

Why don't you ask Uccmal via private message?

 

That was certainly a catalyst to my thinking about it.  I wasn't picking on him.  It just occurred to me it is really difficult.  Bill Miller performed spectacularly until he didn't and much was lost.  You can find dozens who have crashed badly enough their long term records reverted to the average.  Lampert did great until he met Sears - then he ran into himself and the Peter Principle. 

 

Its awfully hard to recover from a really ugly pick(s).  Walter Schloss kept up high returns for decades by sticking to a tight formula, and never doubling down on anything.  John Neff did the same, with similar results as Walter. 

 

Partly I am tired of my own crappy results the last couple of years.  My portfolio is Now 90% in dividend payers, except pdh, and pwt.  I am trying to pick companies that will maintain, and raise their dividends regularly.  I am willing to take lower total returns to have downside protection.  And I am trying to get them on sale, at least somewhat. 

[AzCactus]

I don't think anyone said it was easy to outperform.  I also think that if Horsehead hadn't gone broke this thread likely would not have come up.

 

Why don't you ask Uccmal via private message?

 

That was certainly a catalyst to my thinking about it.  I wasn't picking on him.  It just occurred to me it is really difficult.  Bill Miller performed spectacularly until he didn't and much was lost.  You can find dozens who have crashed badly enough their long term records reverted to the average.  Lampert did great until he met Sears - then he ran into himself and the Peter Principle. 

 

Its awfully hard to recover from a really ugly pick(s).  Walter Schloss kept up high returns for decades by sticking to a tight formula, and never doubling down on anything.  John Neff did the same, with similar results as Walter. 

 

Partly I am tired of my own crappy results the last couple of years.  My portfolio is Now 90% in dividend payers, except pdh, and pwt.  I am trying to pick companies that will maintain, and raise their dividends regularly.  I am willing to take lower total returns to have downside protection.  And I am trying to get them on sale, at least somewhat.

 

I think sticking to a system forever is really hard.  Especially the way Schloss did.  Again, I think the sports analogy is fair you work very hard in the beginning and than you get a big contract (more AUM) and mistakes seem to pop up more.  Not a perfect analogy but I do think its a fair one.