Career Advice - Is Value Investing Employable?

[Jurgis]

I don't think I understand this debate....

 

Let's say an index of stocks has 100 stocks that begin at 1.0% weight. 99 of them are flat for the year. 1 of them goes up 3X and becomes 2.9% of the index (3/103).

 

99% of the initial dollar weighted index under performed the index, correct?

 

Mhm. :) Although topofeaturellc is trying to make this more complicated by talking about investors holding the shares.

Still what you said is true and is perhaps better example/explanation than mine was.

 

[Sionnach]

I think a better example would be to look at a single transaction:

 

If every investor is equal weight and two investors trade a single share (one buys, one sells). The buyer then becomes overweight that security relative to the index and the seller becomes underweight the security. Therefore one investor will have positive alpha equal to the negative alpha of the other investor.

[winjitsu]

That sentence is not logical.  You can't believe in factors and then say beta, alpha and CAPM are crap.  Say the are overly simplistic or that they're explanatory  power is overstated, but the theory itself is a just the very first step in the path to establishing a framework.

 

I'd be pretty happy taking a net on the lack of real alpha generation in the world btw. Truly idiosyncratic outperformance is is so rare as to being basically impossible to distinguish from luck.

 

CAPM is a theory. If I accept that theory, I understand the argument that long-only is beta with factors. I don't accept this framework (I think it's crap), but I still understand your line of reasoning.

Personally, I'm much more keen on adaptive market hypothesis, though it's not nearly as accepted or established in the literature. 

 

Agree to disagree on alpha, but maybe its all liquidity premium for us smaller investors anyways... [assuming I accept CAPM  :)]

[Jurgis]

I think a better example would be to look at a single transaction:

 

If every investor is equal weight and two investors trade a single share (one buys, one sells). The buyer then becomes overweight that security relative to the index and the seller becomes underweight the security. Therefore one investor will have positive alpha equal to the negative alpha of the other investor.

 

What you are saying is that alpha is zero sum game (in closed system). This is true.

 

However, this in no way relates to the claim that "on a dollar weighted basis half of investors have to outperform an index."

Not sure if you wanted to relate to that claim or not.  8)

Maybe the claim "on a dollar weighted basis half of investors have to outperform an index." was supposed to express that alpha is zero sum game. Maybe it was supposed to say: "in dollars outperformers outperform by the same sum as the underperformers underperform". But that's not what it said.  8)

[Jurgis]

I'm not associated with this. Just came through my infoporn feed and I thought it was fun interesting opportunity:

 

Columbia University Post-Doctoral Research Scientist, Machine Learning in Wealth Management

http://jobs.acm.org/jobseeker/job/32715897/?utm_source=JobFlash&utm_medium=Email&utm_content=JobPosting&utm_campaign=JobFlash-3%2B01%2C%2B2017

 

"There is also an opportunity to be involved in a start-up company arising from the research of the Center."

 

8)

[Sionnach]

I think a better example would be to look at a single transaction:

 

If every investor is equal weight and two investors trade a single share (one buys, one sells). The buyer then becomes overweight that security relative to the index and the seller becomes underweight the security. Therefore one investor will have positive alpha equal to the negative alpha of the other investor.

 

What you are saying is that alpha is zero sum game (in closed system). This is true.

 

However, this in no way relates to the claim that "on a dollar weighted basis half of investors have to outperform an index."

Not sure if you wanted to relate to that claim or not.  8)

Maybe the claim "on a dollar weighted basis half of investors have to outperform an index." was supposed to express that alpha is zero sum game. Maybe it was supposed to say: "in dollars outperformers outperform by the same sum as the underperformers underperform". But that's not what it said.  8)

 

Here's the quote from the Sharpe paper that proved it:

"Over any specified time period, the market return will be a weighted average of the returns on the securities within the market, using beginning market values as weights. Each passive manager will obtain precisely the market return, before costs. From this, it follows (as the night from the day) that the return on the average actively managed dollar must equal the market return. Why? Because the market return must equal a weighted average of the returns on the passive and active segments of the market. If the first two returns are the same, the third must be also."

 

Tbh I haven't completely wrapped my head around it, but i'm not sure i'd go around disagreeing with Sharpe and Mauboussin, who are both miles smarter than I am.

 

I think my single transaction example works pretty well for me. If that's replicated for each transaction then on a dollar weighted basis (as the night from the day) half would outperform and half would underperform before fees

 

 

[Sionnach]

I think a better example would be to look at a single transaction:

 

If every investor is equal weight and two investors trade a single share (one buys, one sells). The buyer then becomes overweight that security relative to the index and the seller becomes underweight the security. Therefore one investor will have positive alpha equal to the negative alpha of the other investor.

 

What you are saying is that alpha is zero sum game (in closed system). This is true.

 

 

What do you mean by "closed system" by the way?

[LC]

My 2 cents on the original topic: better to start your career in something more traditional. Easier money. More money. Invest on the side. If you are damn good doing this, and turn a few hundred grand into a million +, then you might want to think about selling your services.

[Jurgis]

I think a better example would be to look at a single transaction:

 

If every investor is equal weight and two investors trade a single share (one buys, one sells). The buyer then becomes overweight that security relative to the index and the seller becomes underweight the security. Therefore one investor will have positive alpha equal to the negative alpha of the other investor.

 

What you are saying is that alpha is zero sum game (in closed system). This is true.

 

However, this in no way relates to the claim that "on a dollar weighted basis half of investors have to outperform an index."

Not sure if you wanted to relate to that claim or not.  8)

Maybe the claim "on a dollar weighted basis half of investors have to outperform an index." was supposed to express that alpha is zero sum game. Maybe it was supposed to say: "in dollars outperformers outperform by the same sum as the underperformers underperform". But that's not what it said.  8)

 

Here's the quote from the Sharpe paper that proved it:

"Over any specified time period, the market return will be a weighted average of the returns on the securities within the market, using beginning market values as weights. Each passive manager will obtain precisely the market return, before costs. From this, it follows (as the night from the day) that the return on the average actively managed dollar must equal the market return. Why? Because the market return must equal a weighted average of the returns on the passive and active segments of the market. If the first two returns are the same, the third must be also."

 

Tbh I haven't completely wrapped my head around it, but i'm not sure i'd go around disagreeing with Sharpe and Mauboussin, who are both miles smarter than I am.

 

I think my single transaction example works pretty well for me. If that's replicated for each transaction then on a dollar weighted basis (as the night from the day) half would outperform and half would underperform before fees

 

I don't think we are disagreeing at all.

[DocSnowball]

The following is going to be controversial. Don't read if you have dreams of working as value investor. You've been warned.  8)

 

 

 

 

For young people who are thinking of becoming great investors (value or whatever other approach), I would say that this is a crappy life plan. Couple reasons for that.

 

First, very very very few people outperform. Most people on CoBF don't outperform. Most of 0.1% of 1% don't outperform. Sure you can gather fees without outperforming, but if that's your life plan, then just call the spade a spade and call yourself a good salesperson or a good financial advisor (yeah, the kind who is part trusted financial person, part psychologist, part priest). Don't call yourself great investor. Nothing bad in being good financial advisor. They are rare breed IMO and definitely needed. (Fee gathering salespeople... CPA's them...)

 

Second, even if you're one of the people who will outperform, IMO the outperformance will become harder and harder going forward. There's maybe 10-15 more years of viability. After that - if we get superhuman AI - and we will - kiss this good bye. Maybe even way before superhuman general AI. Want proof? Poker players can already say goodbye to their jobs ... Of course, AI won't be allowed into poker tournaments - they are for genuine humans only - but in the market nobody knows you're a dog AI.

 

Third, even if you're one of the people who will outperform, most likely you also have IQ and capacity to do great things in other areas. Choose something productive rather than moving money from point A to point B and earning fees and/or cap gains. Go into computer science, biotech, robotics, space, boring company :P, energy, etc. More on the entrepreneurial side? Go start a company. Build something. You'll make tons of money in it too. And you'll probably make a world better place. Way more contribution than just investing. (Yeah, I know Buffett's 90%+ donation is also making world better place. You gonna sign a pledge to follow his footsteps?)

 

 

And if you really want, you can still value invest on the side.  8)

 

Not that the above will persuade anyone to change their path.

+1

 

In the middle of an MBA with focus on healthcare and investing (got the investing bug a year ago) and considered the professional options - investing as an individual is so much easier and more fun, esp if you like your day job. Not having too much time to make silly decisions, and not being answerable to customers for the returns makes it a lot easier to concentrate and follow the small group of companies closely. I have no experience on the professional side, but to me investing makes the day job feel like "tap dancing to work" if you have another stream of income coming in from working for yourself in investing.

 

While I agree that it is difficult to beat the index, investing is also a meritocracy unlike many corporate jobs as your hard work and luck rather than petty politics determine the rewards. Also being an active investor is worth it just for the fun and learning from it that is put to good use in future investing and other fields of life. As long as the snowball is rolling and collecting snowflakes (Buffett) and you go to sleep a little smarter than when you woke up (Munger) who cares...

[Sionnach]

 

 

While I agree that it is difficult to beat the index, investing is also a meritocracy unlike many corporate jobs as your hard work and luck rather than petty politics determine the rewards. Also being an active investor is worth it just for the fun and learning from it that is put to good use in future investing and other fields of life. As long as the snowball is rolling and collecting snowflakes (Buffett) and you go to sleep a little smarter than when you woke up (Munger) who cares...

 

+1. Investing on the side is a phenomenal way to learn about business. Can't tell you how much it's helped me in other careers. Most investors are very introspective, as well, so it's helpful in terms of just understanding yourself and your emotions better.

 

As you said, its a meritocracy. There are no rules for achieving success. Look at Allan Mecham. The guy didn't graduate college and is managing a Bil'.

 

Of course, the goal isn't to have the greatest number of assets (its a nice side benefit), but these guys are extremely proud of their track record because they work hard, love the challenge, and would do it even if they didn't get paid

 

 

 

[Jurgis]

I think a better example would be to look at a single transaction:

 

If every investor is equal weight and two investors trade a single share (one buys, one sells). The buyer then becomes overweight that security relative to the index and the seller becomes underweight the security. Therefore one investor will have positive alpha equal to the negative alpha of the other investor.

 

What you are saying is that alpha is zero sum game (in closed system). This is true.

 

 

What do you mean by "closed system" by the way?

 

"Closed system" means that we are only measuring effects within the system itself, there are no leakages outside, and/or they are not included in the measurement. E.g. if you allowed for investors to hold non-index securities and/or cash and measured outperformance including these, then the zero sum game does not apply. Or more precisely it only applies once you make the index that includes these formerly-non-index-securities-cash/etc.