beating the market - not what it used to be

[Spekulatius]

I think it is difficult for value investors to succeed beating the index, when thr market is rising mainly because of multiple expansion, which is what has happened from 2012 to now basically.

 

Multiple expansion is not so much driven by fundamentals, but rather by exogenous factors (interest rates, momentum etc) which tend to be ignored by value investors. I also think that many successful business starting out as asset light models means that value investors ignore them or underestimate their growth potential. The latter is really a paradigm shift, while the former will very likely reverse itself.

[CorpRaider]

It really is remarkable how difficult it is to out-perform especially when you consider the virtually unlimited resources that some of these firms employ.

 

Suppose you're a small fund generating a lot of alpha. What happens? You attract more investor money. Because you invested your original capital the best you could, this additional money must be invested in less promising ways - i.e. the law of diminishing returns. As long as you generate alpha, you continue to attract more money which lowers your alpha.

 

This is why big hedge funds with unlimited resources have trouble beating ETFs. Just because it's hard for them doesn't mean it should be hard for you.

 

This said, I usually advise people to stick to ETFs except where they have specialized knowledge the market is unlikely to price in.

 

That's kind of the big muscle movement of capitalism, isn't it?  Excess returns get pushed toward the average by the allocation of capital.  Should apply to industries, markets, and investment styles and/or funds.  I agree with OP that the average investment dollar must underperform the index materially after taxes and costs are included.

[Jurgis]

What may be interesting is that, if you are right and have a strong inner score card, the periods of under-performance are often preceded, and followed by, remarkable out-performance.

 

It is also possible that the statements like this are just making people to continue investing badly in a nebulous hope of the "remarkable out-performance".

 

 

[Jurgis]

If you return 10% using a low risk method its far more valuable than 10% of high risk. Value investing is a way of mitigating risk.

 

Show me anyone who can actually measure risk. Really measure it rather than waving hands about margin of safety, intrinsic value and value investing.

I'm interested.

 

I'm gonna go ScottHall here and say that FB might be less risky investment than 10 value stocks.  8)

[rb]

What may be interesting is that, if you are right and have a strong inner score card, the periods of under-performance are often preceded, and followed by, remarkable out-performance.

 

It is also possible that the statements like this are just making people to continue investing badly in a nebulous hope of the "remarkable out-performance".

Well some people are just bad investors.

[Cigarbutt]

What may be interesting is that, if you are right and have a strong inner score card, the periods of under-performance are often preceded, and followed by, remarkable out-performance.

 

 

It is also possible that the statements like this are just making people to continue investing badly in a nebulous hope of the "remarkable out-performance".

 

The idea is to share data and describe potential outcomes with an audience of independent thinkers.

 

The constructive aim was to underline how short term thinking and performance chasing can hurt returns. The Dalbar studies show this really well at the retail level.

 

https://www.ifa.com/articles/dalbar_2016_qaib_investors_still_their_worst_enemy/

 

But nobody says that it’s easy. One has to decide if it is worth the try.

 

I think it is reasonable to assume that most “true” value investors, once inoculated, won’t radically change their approach but it’s been said that, historically, bull markets get to their cruising speed when enough “value” investors have switched to the “growth” camp.

 

BTW, I like the way DTEJD1997 says it in reply #22 and it’s important to not let the Market be your guide because it is there to serve you, if you so decide.

 

Peace.

 

[rb]

If you return 10% using a low risk method its far more valuable than 10% of high risk. Value investing is a way of mitigating risk.

 

Show me anyone who can actually measure risk. Really measure it rather than waving hands about margin of safety, intrinsic value and value investing.

I'm interested.

 

I'm gonna go ScottHall here and say that FB might be less risky investment than 10 value stocks.  8)

Yes, it's true. Risk is incredibly hard to quantify. But that is where the art part of investing kicks is and where the wheat separates from the chaff over time.

 

If you think about it, being a good investor is all about managing risk. If you're actually good at no making mistakes you will do quite well over time even if you're not that good at picking the big winners. And it's a lot easier to be careful than to be brilliant.

[Jurgis]

What may be interesting is that, if you are right and have a strong inner score card, the periods of under-performance are often preceded, and followed by, remarkable out-performance.

 

 

It is also possible that the statements like this are just making people to continue investing badly in a nebulous hope of the "remarkable out-performance".

 

The idea is to share data and describe potential outcomes with an audience of independent thinkers.

 

The constructive aim was to underline how short term thinking and performance chasing can hurt returns. The Dalbar studies show this really well at the retail level.

 

https://www.ifa.com/articles/dalbar_2016_qaib_investors_still_their_worst_enemy/

 

But nobody says that it’s easy. One has to decide if it is worth the try.

 

I think it is reasonable to assume that most “true” value investors, once inoculated, won’t radically change their approach but it’s been said that, historically, bull markets get to their cruising speed when enough “value” investors have switched to the “growth” camp.

 

BTW, I like the way DTEJD1997 says it in reply #22 and it’s important to not let the Market be your guide because it is there to serve you, if you so decide.

 

Peace.

 

Yeah, agreed.

 

Good luck  8)

[Jurgis]

If you think about it, being a good investor is all about managing risk. If you're actually good at no making mistakes you will do quite well over time even if you're not that good at picking the big winners. And it's a lot easier to be careful than to be brilliant.

 

I don't know. Is it really "a lot easier to be careful than to be brilliant"?  8)

Maybe what you mean it's easier to be careful about known quantifiable risks: e.g. don't invest in a company with a bad balance sheet, losing money, cyclical if you want to avoid BK risk.

The rest is more of an art (like you said): every company that is cheap-enough (and even every company that is expensive) has some risks and only you can try to evaluate if they are big enough to avoid investing or not serious enough to prevent investing. But that's not easy.  8)

[rb]

Well if it was really easy then everyone would be really good at this stuff wouldn't they?

[ScottHall]

My #1 advice for learning to beat the market is diversification.

 

I have >30 stocks and am up ~19% so far this year. There are risk benefits to diversification but also second order benefits. One of the biggest second order benefits is that because of wide diversification, it's not such a big deal if one or two of them blow up, allowing you to do more research and development positions.

 

When I buy, I seldom ever put even 15% into any one stock. When I do it has to be an obvious winner for me. Most of my allocations are single digit. The reason why I like this style, as opposed to the concentrated style I used to employ, is that I kind of want one or two of them to blow up.

 

I know that sounds strange, but I have found value in it. Every year I allocate a small amount of the portfolio to R&D investments in new styles I am not as familiar with. The idea is that by entering fields I don't know a lot about, I will probably take some beatings, but I will gain a lot of general knowledge too. And by doing so I may pick up insights to improve my investing style.

 

This is how I finally got over my aversion to growth investing, starting with a very small investment in Amazon. From there it became a spiral and I have GOOG, FB and so many other growth stocks. They've been big winners for my portfolio.

 

It's harder to do R&D positions when you're putting your whole stack on the line on a handful of securities. You get more exposure to your best ideas that way, certainly, but at some cost of internal development that may prevent you from expanding your universe of "best ideas."

 

For those playing the long game, I like the diversification strategy. Over time I want to build as big of an investable universe for myself as possible, and so much of that comes down to exposure.

[StubbleJumper]

My #1 advice for learning to beat the market is diversification.

 

 

 

 

That's funny.  My #1 advice for learning to beat the market is concentration in high conviction positions.  Don't waste capital on your 27th best idea.

 

Cheers.

 

 

SJ

[John Hjorth]

StubbleJumper,

 

Please don't take the post by Scott seriously - unless Scott posts his 30 ticker portfolio, generating 19% ytd, here in this topic. [i have posted about this before, recently.]

[Jurgis]

Actually, I mostly agree with ScottHall.  8)

[rb]

I may be wrong, but isn't Scott the guy that makes investment decisions based on 10-15 minutes of research? In that case diversification is a smart move.

[rb]

Actually, I mostly agree with ScottHall.  8)

Yea but you also don't beat the market  :P ;D 8)

[John Hjorth]

Actually, I mostly agree with ScottHall.  8)

 

Sure you do, Jurgis. The point here is that you're not not anywhere near up 19 percent this year. - Please remember, I'm the only guy reading your investment blog! [i really could not help it here! [ ; - D]]

[oddballstocks]

I agree with Scott, I don't know how many stocks I own, maybe 30-40, (50?).  I haven't counted.

 

I looked at performance.  Across all accounts up about 7.5% YTD, one account up 14% YTD.  I'm at about 40% cash overall.  So these are decent numbers.

 

You never know what's going to have a good year.

 

I disagree about the 27th best idea, total straw man.  Unless you're sitting down with a pile of cash and have to invest 100% of it today.  I have a fluid portfolio, I'm ALWAYS investing in my 1st best idea.  My aim is to sell about 10-20% of my portfolio a year and find replacement ideas. 

 

I recently invested in a name that I've watched and finally became cheap.  The only investment in the past few months, so it's my best idea, does that mean the other 30-40 ideas are bad? Nope, they were the best at the time as well, and now I'm waiting on them to be realized.

 

Here's a bad realization for the forum.  In the past ~2 years as I've focused more on my business and less on investing my performance has improved.  I'm looking for fish in a barrel, when I see it I shoot, otherwise I sit on cash or current ideas.  Having this filter has helped me greatly.

 

There's value everywhere, you just need to know the market.  I've been trawling ebay recently and have developed a sense of 'value' for a number of items.  I have picked up about $50k in list price items for roughly $10k.  This isn't an anomaly, my brother does the exact same thing with a different market on eBay, you just need to have a sense of what things go for.  Then be opportunistic when things open up.  I've done the same with Craigslist in the past, study a market, discover what others will pay, then buy for less and resell.  It isn't rocket science, you just need discipline.  No deal is better than a bad deal.

 

I think too many investors complicate investing too much.  Probably because investing attracts smart people.  There are a lot of stupid simple situations that people avoid because they're too simple.

 

Regarding risk, this is an interesting discussion.  I look at risk in terms of probabilities.  Is it likely that I make more or less?  If something is 50/50 it's not worth it.  If something is 80/20 I'm interested.  Sometimes in the market (a net-net, low P/B stock) you can have a 100/0 situation where if you're simply patient it's almost impossible to lose money.  You do have opportunity cost, but as noted above if you diversify you eliminate that.  Most things work out in 3-5 years, if they don't cut your losses and move on.

 

If there aren't deals you just sit.  Deals seem to come in flows, so nothing for a while, then suddenly a bunch.  What I've noticed from friends is too much analysis paralysis is what prevents people from buying cheap.  They want to know why, or how, or what might happen.  I'm reckless, I don't care, if a deal is a deal I buy.  Sure, I've been burned a few times (diversification), but overall it works out 95% of the time in my benefit.  Maybe I'm lucky?  I don't care, I'm happy with the results.

[StubbleJumper]

I agree with Scott, I don't know how many stocks I own, maybe 30-40, (50?).  I haven't counted.

 

I looked at performance.  Across all accounts up about 7.5% YTD, one account up 14% YTD.  I'm at about 40% cash overall.  So these are decent numbers.

 

You never know what's going to have a good year.

 

I disagree about the 27th best idea, total straw man.  Unless you're sitting down with a pile of cash and have to invest 100% of it today.  I have a fluid portfolio, I'm ALWAYS investing in my 1st best idea.  My aim is to sell about 10-20% of my portfolio a year and find replacement ideas. 

 

I recently invested in a name that I've watched and finally became cheap.  The only investment in the past few months, so it's my best idea, does that mean the other 30-40 ideas are bad? Nope, they were the best at the time as well, and now I'm waiting on them to be realized.

 

Here's a bad realization for the forum.  In the past ~2 years as I've focused more on my business and less on investing my performance has improved.  I'm looking for fish in a barrel, when I see it I shoot, otherwise I sit on cash or current ideas.  Having this filter has helped me greatly.

 

There's value everywhere, you just need to know the market.  I've been trawling ebay recently and have developed a sense of 'value' for a number of items.  I have picked up about $50k in list price items for roughly $10k.  This isn't an anomaly, my brother does the exact same thing with a different market on eBay, you just need to have a sense of what things go for.  Then be opportunistic when things open up.  I've done the same with Craigslist in the past, study a market, discover what others will pay, then buy for less and resell.  It isn't rocket science, you just need discipline.  No deal is better than a bad deal.

 

I think too many investors complicate investing too much.  Probably because investing attracts smart people.  There are a lot of stupid simple situations that people avoid because they're too simple.

 

Regarding risk, this is an interesting discussion.  I look at risk in terms of probabilities.  Is it likely that I make more or less?  If something is 50/50 it's not worth it.  If something is 80/20 I'm interested.  Sometimes in the market (a net-net, low P/B stock) you can have a 100/0 situation where if you're simply patient it's almost impossible to lose money.  You do have opportunity cost, but as noted above if you diversify you eliminate that.  Most things work out in 3-5 years, if they don't cut your losses and move on.

 

If there aren't deals you just sit.  Deals seem to come in flows, so nothing for a while, then suddenly a bunch.  What I've noticed from friends is too much analysis paralysis is what prevents people from buying cheap.  They want to know why, or how, or what might happen.  I'm reckless, I don't care, if a deal is a deal I buy.  Sure, I've been burned a few times (diversification), but overall it works out 95% of the time in my benefit.  Maybe I'm lucky?  I don't care, I'm happy with the results.

 

 

Never in my life have I owned 30 stocks [*edit* at any one time].  But, then what do I know?

 

 

SJ

[John Hjorth]

My #1 advice for learning to beat the market is diversification.

 

I have >30 stocks and am up ~19% so far this year. ...

 

Scott, where are you?

[oddballstocks]

I agree with Scott, I don't know how many stocks I own, maybe 30-40, (50?).  I haven't counted.

 

I looked at performance.  Across all accounts up about 7.5% YTD, one account up 14% YTD.  I'm at about 40% cash overall.  So these are decent numbers.

 

You never know what's going to have a good year.

 

I disagree about the 27th best idea, total straw man.  Unless you're sitting down with a pile of cash and have to invest 100% of it today.  I have a fluid portfolio, I'm ALWAYS investing in my 1st best idea.  My aim is to sell about 10-20% of my portfolio a year and find replacement ideas. 

 

I recently invested in a name that I've watched and finally became cheap.  The only investment in the past few months, so it's my best idea, does that mean the other 30-40 ideas are bad? Nope, they were the best at the time as well, and now I'm waiting on them to be realized.

 

Here's a bad realization for the forum.  In the past ~2 years as I've focused more on my business and less on investing my performance has improved.  I'm looking for fish in a barrel, when I see it I shoot, otherwise I sit on cash or current ideas.  Having this filter has helped me greatly.

 

There's value everywhere, you just need to know the market.  I've been trawling ebay recently and have developed a sense of 'value' for a number of items.  I have picked up about $50k in list price items for roughly $10k.  This isn't an anomaly, my brother does the exact same thing with a different market on eBay, you just need to have a sense of what things go for.  Then be opportunistic when things open up.  I've done the same with Craigslist in the past, study a market, discover what others will pay, then buy for less and resell.  It isn't rocket science, you just need discipline.  No deal is better than a bad deal.

 

I think too many investors complicate investing too much.  Probably because investing attracts smart people.  There are a lot of stupid simple situations that people avoid because they're too simple.

 

Regarding risk, this is an interesting discussion.  I look at risk in terms of probabilities.  Is it likely that I make more or less?  If something is 50/50 it's not worth it.  If something is 80/20 I'm interested.  Sometimes in the market (a net-net, low P/B stock) you can have a 100/0 situation where if you're simply patient it's almost impossible to lose money.  You do have opportunity cost, but as noted above if you diversify you eliminate that.  Most things work out in 3-5 years, if they don't cut your losses and move on.

 

If there aren't deals you just sit.  Deals seem to come in flows, so nothing for a while, then suddenly a bunch.  What I've noticed from friends is too much analysis paralysis is what prevents people from buying cheap.  They want to know why, or how, or what might happen.  I'm reckless, I don't care, if a deal is a deal I buy.  Sure, I've been burned a few times (diversification), but overall it works out 95% of the time in my benefit.  Maybe I'm lucky?  I don't care, I'm happy with the results.

 

 

Never in my life have I owned 30 stocks [*edit* at any one time].  But, then what do I know?

 

 

SJ

 

For a while I owned 30+ small banks alone.  I've since trimmed it down.

 

Just counted, just shy of 40 positions.

 

To each their own...if you can beat the market to your satisfaction with a few positions then more power to you.

 

I'll add a caveat, I own a business, and the value of the business dwarfs my investments.  So in a sense I'm very concentrated in a single illiquid position, but I can control this position whereas in the public markets I don't control anything I own shares of.

[StubbleJumper]

I agree with Scott, I don't know how many stocks I own, maybe 30-40, (50?).  I haven't counted.

 

I looked at performance.  Across all accounts up about 7.5% YTD, one account up 14% YTD.  I'm at about 40% cash overall.  So these are decent numbers.

 

You never know what's going to have a good year.

 

I disagree about the 27th best idea, total straw man.  Unless you're sitting down with a pile of cash and have to invest 100% of it today.  I have a fluid portfolio, I'm ALWAYS investing in my 1st best idea.  My aim is to sell about 10-20% of my portfolio a year and find replacement ideas. 

 

I recently invested in a name that I've watched and finally became cheap.  The only investment in the past few months, so it's my best idea, does that mean the other 30-40 ideas are bad? Nope, they were the best at the time as well, and now I'm waiting on them to be realized.

 

Here's a bad realization for the forum.  In the past ~2 years as I've focused more on my business and less on investing my performance has improved.  I'm looking for fish in a barrel, when I see it I shoot, otherwise I sit on cash or current ideas.  Having this filter has helped me greatly.

 

There's value everywhere, you just need to know the market.  I've been trawling ebay recently and have developed a sense of 'value' for a number of items.  I have picked up about $50k in list price items for roughly $10k.  This isn't an anomaly, my brother does the exact same thing with a different market on eBay, you just need to have a sense of what things go for.  Then be opportunistic when things open up.  I've done the same with Craigslist in the past, study a market, discover what others will pay, then buy for less and resell.  It isn't rocket science, you just need discipline.  No deal is better than a bad deal.

 

I think too many investors complicate investing too much.  Probably because investing attracts smart people.  There are a lot of stupid simple situations that people avoid because they're too simple.

 

Regarding risk, this is an interesting discussion.  I look at risk in terms of probabilities.  Is it likely that I make more or less?  If something is 50/50 it's not worth it.  If something is 80/20 I'm interested.  Sometimes in the market (a net-net, low P/B stock) you can have a 100/0 situation where if you're simply patient it's almost impossible to lose money.  You do have opportunity cost, but as noted above if you diversify you eliminate that.  Most things work out in 3-5 years, if they don't cut your losses and move on.

 

If there aren't deals you just sit.  Deals seem to come in flows, so nothing for a while, then suddenly a bunch.  What I've noticed from friends is too much analysis paralysis is what prevents people from buying cheap.  They want to know why, or how, or what might happen.  I'm reckless, I don't care, if a deal is a deal I buy.  Sure, I've been burned a few times (diversification), but overall it works out 95% of the time in my benefit.  Maybe I'm lucky?  I don't care, I'm happy with the results.

 

 

Never in my life have I owned 30 stocks [*edit* at any one time].  But, then what do I know?

 

 

SJ

 

For a while I owned 30+ small banks alone.  I've since trimmed it down.

 

Just counted, just shy of 40 positions.

 

To each their own...if you can beat the market to your satisfaction with a few positions then more power to you.

 

I'll add a caveat, I own a business, and the value of the business dwarfs my investments.  So in a sense I'm very concentrated in a single illiquid position, but I can control this position whereas in the public markets I don't control anything I own shares of.

 

Yep, and for me a quick count yields 14, of which 2 are special situations which are (hopefully!) short term in nature.

 

But hey, it's worked for me.  I'm normally damned happy if I get two great ideas per year.  Some years I don't get any great ideas and I just shlock along adding money to things like WFC or BRK.

 

 

SJ

[randomep]

This topic comes up every few months I think. It basically says today it is hard to beat the contemporary market because somehow it is more efficient.

 

But there are also other threads that say the market is more much volatile than earlier times, why is that?

 

The latter statement is pretty easy to confirm by looking at the s&p 500 index over the last 150years or so (preferably on a log graph). You cannot say that the market was more volatile over some other 30year period compared to 1988-2018.

 

For some it may be hard to reconcile these two contradictory views.

 

A third line of thought goes well there are "insiders" or people with vastly more resources who have amassed a disporportionate amount of market gains.  Why question for them is, who are hey? It isn't Buffett or Todd Combs or Weschler then who are they? Aren't those 3 gentlemen the ultimate market insiders?  It is obvious to me that alot of whom we consider market insider type of money managers are simply making their money off fees and in general lag market.

 

So who the hell is actually making good money off the market?  It seems like the type of folks that are in this forum, or the types in the big short. You just don't really know who they are ahead of time until they are rich and fat.  Only then can you tell who they are and how they did it (probably in a Michael lewis book)

 

 

[StevieV]

"Across all accounts up about 7.5% YTD, one account up 14% YTD.  I'm at about 40% cash overall.  So these are decent numbers."

 

I believe you are saying that your accounts are up 7.5%, including the cash.  If so, I would call that much better than decent.

[randomep]

I love reading about secret millionaires.  Who wants to bet that these people have better rates of return over their investing lifetime that the Sp500 or Donald Trump???

 

https://www.nytimes.com/2018/05/06/nyregion/secretary-fortune-donates.html