Why /biz/ investors underperform the market.

[Anonymous No.1467952]

https://web.stanford.edu/~wfsharpe/art/active/active.htm

"Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs. Empirical analyses that appear to refute this principle are guilty of improper measurement."

-William Sharpe, Nobel Laureate in Economics, 1990

[Anonymous No.1467958]

>>1467952
in 1990 maybe. But there were so many opportunities for actively managed investments to crush it from 98-present day. Tech stocks, bitcoin, etc.

not saying you're wrong as a whole, but there will always be a handful of people that get very rich actively investing on the right thing at the right time. most people on here are just chasing that luck, like gambling.

[Anonymous No.1467964]

>>1467958
so you're basically saying that apart from a few people, active investors get burned

[Anonymous No.1467974]

>>1467952
Visit TastyTrade studies and read again bucks. Literally dozens of studies more recent than 1990 have shown the opposite. Active management guarentees winning trades and and minimizes or reverses losing trades.
>inb4 1970s studies only buy and hold indexes

[Anonymous No.1467975]

>>1467964
yes I'm agreeing with his position, but not the wording of the quote he chose. and also trying to explain to him why /biz/ doesn't care about this and is trying to get rich quick.

[Anonymous No.1467976]

>>1467952
>Empirical analyses that appear to refute this principle are guilty of improper measurement."
proofs?

[Anonymous No.1467980]

Please reply with tickers of actively managed funds that have outperformed their appropriate benchmarks consistently for the past 18 years. I bet you won't find more than five.

[Anonymous No.1467984]

>>1467980
what we should be asking is why do people pay millions and millions of dollars for active managers?

[Anonymous No.1467993]

>>1467984
Indeed.

[Anonymous No.1467997]

>>1467974
(185) "All the time and effort people devote to picking the right fund, the hot hand, the great manager have, in most cases, led to no advantage." and "Most individual investors would be better off in an index mutual fund." 2-Apr-90 - Barron's, p. 15

-Peter Lynch

[Anonymous No.1468003]

>>1467976
Proofs? All you need to know is simple math to understand Sharpe's thesis.

[Anonymous No.1468027]

>>1467997
Ya well did you even fucking read what I said?

[Anonymous No.1468132]

>>1467974
There are zero academic studies more recent than 1990 that have shown that active trading outperforms index investing.

Zero.

Zero.

Zero.

https://faculty.chicagobooth.edu/john.cochrane/teaching/35150_advanced_investments/Luck%20versus%20Skilll%20in%20the%20Cross%20Section%20of%20Mutual%20Fund%20Returns.pdf

[Anonymous No.1468227]

>>1468003
so no proof then

[Anonymous No.1468802]

>>1468227
Here you go.

[Anonymous No.1468804]

>>1468802
>>1468227
Chart is from Vanguard Research April of 2014 FYI.

[Anonymous No.1469525]

bump

[Anonymous No.1469979]

>>1468802
how does that prove this? >>1467976
I'll give you a tip: it fucking doesn't

[Anonymous No.1469995]

It makes perfect sense. Active investing is just shifting stocks around. When you sum up the person bagholding and the person profiting, it must equal the total market value. I mean market in the sense of including every asset that exists.

[Anonymous No.1470050]

>>1469979
If the market return is 10%, the aggregate return of both passive and active investors MUST be 10% before costs. It cannot be any other number. Next, since active investors bear greater costs, their return in aggregate MUST be lower than than that from passive investors. Therefore, the average actively managed dollar must underperform the average passively managed dollar, net of costs.

Either you're trolling hard or truly a retard when it comes to lower math.

[Anonymous No.1470068]

Put your trip back on ihaz

[Anonymous No.1470069]

>>1470050
You can make money from stocks falling and swings in general

[Anonymous No.1470094]

>>1470069
No denying that. But what's your point? Sharpe's paper is talking about active investors in aggregate (as a group). Also, there is absolutely zero proof in the world financial academia showing active investors are able to consistently outperform their appropriate risk-adjusted benchmarks. If you won't listen to me, maybe you'll listen Warren Buffett:

"(220) Most institutional and individual investors will find the best way to own common stock is through an index fund that charges minimal fees. Those following this path are sure to beat the net results [after fees and expenses] delivered by the great majority of investment professionals." 1996 - Shareholder Letter

[Anonymous No.1470103]

>>1470050
lol this is such bullshit....
jesus.

im not even gonna argue. cuz ur str8 up delusional

[Anonymous No.1470118]

>>1470103
(231) "the active investors will have their returns diminished by a far greater percentage than will their inactive brethren. That means that the passive group – the "know-nothings" – must win."

-Warren Buffett, 2007 - 2007 Berkshire Hathaway Shareholder Letter

[Anonymous No.1470125]

>>1470118
spoken like a true billionaire investor.

[Anonymous No.1470135]

>>1470103
Here's an excerpt from 2016 Berkshire Hathaway meeting proving that Buffett is well aware of the folly of active investors. If you think I'm bullshit, then you must also think Buffett is bullshit:

Mr Buffett made the same point at his meeting by asking the 18,000-strong crowd in the arena to imagine we were divided down the middle. On one side would be the “low energy” investors who buy half of everything that exists in the investment world and then do nothing, “a slovenly group that just sits for year after year”. In the other half would be the “hyperactives”, as he described them.
This group, by definition, can’t change from its half of the ultimate investment results. They are going to have the same results as the ‘no energy’ people but they’re also going to have terrific expenses because they’re all going to be moving around, hiring hedge funds, hiring consultants and paying lots of commissions. As a group, that half has to do worse than this half does.

[Anonymous No.1470140]

>>1470135
http://www.ft.com/cms/s/0/6f04eb52-1141-11e6-839f-2922947098f0.html#axzz4IfwVfbgF

[Anonymous No.1470153]

>>1470103
The ironic thing about that quote is that Buffett is referring to stock pickers. You just disproved your own point. lol. That's it, I'm out.

[Anonymous No.1470155]

>>1470135
believe what you want, kiddo.

[Anonymous No.1470159]

>>1470153
just divide warren buffets net worth by his years on earth . and thats about how much money you will need to start with if you wanna become a billionaire investor using """"his"""""" method.

[Anonymous No.1470165]

>>1470159
What?

[Anonymous No.1470174]

>>1470165
ahhh. so you cant calculate or grasp simple math formulas.

yes . keep indexing , babby.

[Anonymous No.1470221]

>>1470174
Please quote my miscalculation.

[Anonymous No.1470226]

>>1470221
i'd rather not waste my time with you.
just keep indexing. call me when you have the net worth of buffet and i'll perform a public act of humiliation in your honor.

[Anonymous No.1470253]

>>1470226
No thanks. You've already humiliated yourself enough.

[Anonymous No.1470256]

>>1470226
Buffet being rich doesn't make index investing wrong because he didn't get rich off the stock market.

[Anonymous No.1470261]

>>1470256
lol, how did he get rich , pray tell?

>>1470253
you result to insults , only because you have no experience or facts, your going to shit ur pants when ur index tanks and probably sell off, so i guess ill have the last laugh , while i'm buying up the shares ur ignorant ass is fear-selling.

[Anonymous No.1470270]

how exactly does /biz/ underperform the market when alot of NEETs got rich off monero quite recently

[Anonymous No.1470275]

>>1470261
>lol, how did he get rich , pray tell?
He got rich by buying an insurance company with LOADS OF MONEY, which he used to buy more companies to generate more excess cash flow. It has nothing to do with stocks and more with buying and controlling actual companies. It's in his goddamn bio.

[Anonymous No.1470276]

>>1470261
The "Arithmetic of Active Management" holds true in all market conditions, both bull and bear markets. "Fear-selling"? I know better than to do such a thing. I choose to take Buffett's advice, unlike yourself:

(236) "The best way in my view is to just buy a low-cost index fund and keep buying it regularly over time, because you'll be buying into a wonderful industry, which in effect is all of American industry...People ought to sit back and relax and keep accumulating over time." 5/7/2007 - CNBC Interview

[Anonymous No.1470278]

>>1470275
oh , right.. he bought companies............
which is totally different from what people do when they buy stock.....
>>1470276
i can tell you are an emotional index speculator who thinks they are a hardened disciplined investor.

[Anonymous No.1470335]

>>1467984

It's all marketing.

[Anonymous No.1470348]

>>1470278
>oh , right.. he bought companies............
>which is totally different from what people do when they buy stock.....

>2016
>not knowing the difference between M&A and purchasing shares in public companies

This board is beyond saving. Nuke it from orbit.

[Anonymous No.1470353]

>>1470348

*investopedia.comrade

What is 'Mergers And Acquisitions - M&A'

M&A can include a number of different transactions, such as mergers, acquisitions, consolidations, tender offers, purchase of assets and management acquisitions. In all cases, two companies are involved, where an acquiring company makes an offer to buy the other company in its entirety or purchase some of its assets.

Merger
In a merger, the boards of directors for two companies approve the combination and seek shareholders' approval. After the merger, the acquired company ceases to exist and becomes part of the acquiring company. A merger in 2007 was a deal between Digital Computers and Compaq, where Compaq absorbed Digital Computers.

Acquisition
In an acquisition, the acquiring company obtains the majority stake in the acquired firms, which does not change its name or legal structure. An example of this transaction is Manulife Financial Corporation's 2004 acquisition of John Hancock Financial Services, where both companies preserved their names and forms of organization.

Consolidation
A consolidation creates a new company. Stockholders of both companies must approve the consolidation, and subsequent to the approval, they receive common equity shares in the new firm. For example, in 1998 Citicorp and Traveler's Insurance Group announced a consolidation, which resulted in Citigroup.

Tender Offer
In a tender offer, one company offers to purchase the outstanding stock of the other firm at a specific price. The acquiring company communicates the offer directly to the other company's shareholders, bypassing the management and board of directors. While the acquiring company may continue to exist, if there are certain dissenting shareholders, most tender offers result in mergers. An example is when Johnson & Johnson made a tender offer in 2008 and acquired Omrix Biopharmaceuticals for $438 million.

[Anonymous No.1470362]

>>1470353
>quoting investopia for any reason whatsoever
>not disproving my point

Do a lot of tender offers recently, anon? No? Then fuck off.

[Anonymous No.1470363]

>>1470348

What is 'Controlling Interest'
Controlling interest occurs when a shareholder, or a group acting in kind, holds a majority of a company's stock. By definition, this figure is 50% of the outstanding shares, plus one. However, controlling interest can be achieved with less than 50% ownership in a company if that person or group owns a significant proportion of its voting shares as in many cases, not every share carries a vote in shareholder meetings.

Next Up
WORKING CONTROL
CONTROL STOCK
VOTING RIGHT
CONTROL
BREAKING DOWN 'Controlling Interest'
Controlling interest gives a shareholder or group of shareholders significant influence over the actions of a company. However, this means that controlling interest can be achieved as long as the ownership stake in a company is proportionately significant in relation to total voting stock. With the majority of large public companies, for example, a shareholder with much less than 50% of the outstanding shares can still have a lot of influence at the company. Single shareholders with as little as 5-10% ownership, for example, can push for their own seats on the board or enact changes at shareholder meetings by publicly lobbying for them, giving them control.


Read more: Controlling Interest Definition | Investopedia http://www.investopedia.com/terms/c/controllinginterest.asp#ixzz4IgcQFnMr
Follow us: Investopedia on Facebook

[Anonymous No.1470376]

>>1470363
>thinks the average investor has the same 'controlling interest' as Buffett
>confirmed for retard

[Anonymous No.1470381]

>>1470376
dont be mad at me, be mad at the investopedia.

[Anonymous No.1470385]

>>1470381
>dont be mad at me, be mad at the investopedia
We're not mad. We're just sad that you're too stupid to understand the words you read, and yet you still feel compelled to shitpost.

[Anonymous No.1470390]

>>1470376
the fact that he buys controlling interest in companies flys directly in the face of everything u index shills keep saying....

do me a favor and don't (you) me any more , cuz im done with this dumb shit.

[Anonymous No.1470392]

>>1467958
>there will always be a handful of people that get very rich actively investing on the right thing at the right time.

yes, like me going all in on monero last week

[Anonymous No.1470415]

>>1470390
The leading finance professors, Nobel Laureates, even Warren Buffett disagree with your claims of superior active management over the indexes, but you think you've got this right and they are all wrong? /Rhetorical

I'll just end with this, it ain't what a man don't know that gets him in trouble, it's what he knows for sure but ain't so.
Like I said eventually you'll figure it out that you're just wrong. I'm done

[Anonymous No.1470426]

>>1470415
told you not to talk to me anymore.

[Anonymous No.1470431]

>>1470426
It's interesting to think that you understand the math and the financial issues better than the leading financial economists. Do you see any single paper or writings that support your view? Does it not even give you pause that you just might be wrong. All rhetorical questions. No need to answer.

[Anonymous No.1470434]

>>1470415
im gonna trust what buffet does, not what he sais.
money talks .bullshit walks. now go take a walk.
or im gonna knock u the FUcK out .

[Anonymous No.1470438]

>>1470431
aight. u cant respect when i told u not 2 talk 2 me?
u bout to catch an asswhooping now chile, i tryed to warn ur dumbass.

[Anonymous No.1470451]

>>1467952

14 “For it will be like a man going on a journey, who called his servants[a] and entrusted to them his property. 15 To one he gave five talents, to another two, to another one, to each according to his ability. Then he went away. 16 He who had received the five talents went at once and traded with them, and he made five talents more. 17 So also he who had the two talents made two talents more. 18 But he who had received the one talent went and dug in the ground and hid his master's money. 19 Now after a long time the master of those servants came and settled accounts with them.

[Anonymous No.1470452]

>>1470451
20 And he who had received the five talents came forward, bringing five talents more, saying, ‘Master, you delivered to me five talents; here I have made five talents more.’ 21 His master said to him, ‘Well done, good and faithful servant.[c] You have been faithful over a little; I will set you over much. Enter into the joy of your master.’ 22 And he also who had the two talents came forward, saying, ‘Master, you delivered to me two talents; here I have made two talents more.’ 23 His master said to him, ‘Well done, good and faithful servant. You have been faithful over a little; I will set you over much. Enter into the joy of your master.’ 24 He also who had received the one talent came forward, saying, ‘Master, I knew you to be a hard man, reaping where you did not sow, and gathering where you scattered no seed, 25 so I was afraid, and I went and hid your talent in the ground. Here you have what is yours.’ 26 But his master answered him, ‘You wicked and slothful servant! You knew that I reap where I have not sown and gather where I scattered no seed? 27 Then you ought to have invested my money with the bankers, and at my coming I should have received what was my own with interest. 28 So take the talent from him and give it to him who has the ten talents. 29 For to everyone who has will more be given, and he will have an abundance. But from the one who has not, even what he has will be taken away. 30 And cast the worthless servant into the outer darkness. In that place there will be weeping and gnashing of teeth.’

[Anonymous No.1470454]

>>1470452
Matthew 25:15 A talent was a monetary unit worth about twenty years' wages for a laborer

[Anonymous No.1470458]

>>1470454
It's good to challenge ideas, but doing so using irrational stories from the Bible is not productive, it's counterproductive.

[Anonymous No.1470461]

>>1470454
Why do you have a computer? or time to spend on /biz/?

You should have given everything to the poor to please your god, sinner.

[Anonymous No.1471522]

Bump

[Anonymous No.1471535]

There are winners and losers in life and the losers outnumber the winners.
More news at 11...

[Anonymous No.1471569]

>>1467952
What do you think about buffetts rebuttal to the emh?

[Anonymous No.1471662]

>>1467974

Yep. I'm in agreement with you. They've got some powerful studies there. I think what is lost of some of these naysayers is that you can do it using far less capital, in a shorter time frame and without exposing all of your capital to the downside all at once. Those, I think, are some of the keys these guys don't get.

I also think that for some of the people here is that you can only do one thing? Why can't you both passively and actively invest at the same time? That's what I fully intend on doing.

The down side of passive index funds is that all of your capital is exposed to massive downwards spikes that can take out years of gains and cost you heaps of time. That still doesn't scare me off as if you can just sit and hold and ride it out as you should do you'll effectively be no worse off, except of course for time. Just in passive investing you can't take advantage of down and sideways markets like you can with active management.

These are quite difficult arguments to have with though with all these people because they are fully indoctrinated by the whole financial services industry that believe all the crap they spout. The only part they are probably fairly right about is to do with the "average investor" Most people won't want to put the effort in to learn to actively manage an investment portfolio.

It's not black and white and you can do both. I'm still learning to actively trade and I'm loving all the intricacies of derivatives trading. It's fascinating and powerful.

[Anonymous No.1472024]

>>1471569
Belief in EMH is not necessary for the indexing strategy IMO. All is needed is to calculate the averages.

[Anonymous No.1472050]

>>1468132
I've heard that 2/3 actively managed funds underperform the index. Can't you just buy the best?
Certain funds are getting more for less risk than others, and with a long history of annualized good growth, you should assume that unless the fund changed somehow, it'd still continue doing so in the future.

Market sentiment and behaviour doesnt change overnight

[Anonymous No.1472067]

>>1470135
Yes. But assume that the amount of people who wishes to do nothing increases. When new people enter and wants to buy (with the intent to hold), demand goes up and such price goes up.

If you can know if or when the newcomers will buy, you can accurately (by simply buying the orders that are out there before them) predict that the price will rise more than the effect of you just buying the stock.

Why do you think the world's richest and most influental businessman wants us to buy and hold? If his strategy depended solely on him having knowledge that the rest of us do not, would he tell everyone whenever he had the chance? No, he wants us to, because using the swings is more effective than riding the average.

[Anonymous No.1472078]

>>1471569
the market is efficient about 50-95% of the time desu senpai. but for real. if the market was 100% efficient. everyone would be rich.
think about it .

[Anonymous No.1472081]

>>1467952

however not all have same or worse drawdown.

[Anonymous No.1472185]

>>1471662
>The down side of passive index funds is that all of your capital is exposed to massive downwards spikes that can take out years of gains and cost you heaps of time.
That's not a downside of passive investing; that's a downside of investing in anything. Investing entails risk. Without the risk, you don't get the reward.

Fortunately, in the case of long-term passive investing, that risk is substantially ameliorated by the long investment horizon. Since bear markets have been historically dwarfed by bull markets, in both magnitude and duration, the risk you allude to is well within the tolerances of most investors.

>you can do it using far less capital, in a shorter time frame and without exposing all of your capital to the downside all at once
This implies, be definition, that you have an investing strategy that yields a higher risk-adjusted return than indexing. You do not. If you did, you'd be one of the wealthiest people in the world. You are not.

People delude themselves into thinking that they'll be the 5% exception who can outperform. They delude themselves into thinking that their commitment, desire, education, time, resources, energy, or skill will assure them a spot in the minority of outlying performers. Anyone -- like you -- who claims to have a better strategy with less or equal risk to indexing is simply in denial.

The only thing you said that's accurate is that its not necessary for your entire portfolio to be passively invested. Your portfolio needs to reflect your risk tolerances. Some people do have higher risk tolerances and are willing to seek more alpha. Doing so once the core of your wealth is already passively invested can be an effective strategy.

But very few, if any, on this board (or in the world, for that matter) have portfolios large enough that adding active investing makes sense. I don't have the sense that many here have a 7 or 8-figure net worth. People need to do what makes sense for them, not for others.

[Anonymous No.1472198]

>>1472185
did you copy and paste this as soon as your wealth management salesman at Vanguard spun you it and you took his dick out your mouth? or did you spend a half a second researching the contrary after you felt bad about swallowing his cum?

[Anonymous No.1472206]

>>1472024
>Belief in EMH is not necessary for the indexing strategy IMO. All is needed is to calculate the averages.
It is pertinent though that buffett personally has beat an indexing strategy by quite a lot, by recognising instances of market inefficiency (value investing).
He even points to other value investors who've done the same.
This does call into question that indexing is the best strategy.

[Anonymous No.1472215]

>>1472206
>It is pertinent though that buffett personally has beat an indexing strategy by quite a lot, by recognising instances of market inefficiency (value investing).
Buffett doesn't do "value investing." Buffett does M&A activity, something far beyond the capabilities and capital of the average investor. M&A is also much riskier than strateght equity plays.

Yes Buffett targets undervalued assets, similar to the average equity value investor. But the similarity ends there. You're not even competing in the same space.

People who point to Buffett as an example of (a) why indexing isn't optimal, (b) why EMH is suspect, or (c) how easy it is to beat the market, don't really understand what Buffett does and how he made his money.

[Anonymous No.1472232]

>>1472215
>People who point to Buffett as an example of (a) why indexing isn't optimal, (b) why EMH is suspect, or (c) how easy it is to beat the market, don't really understand what Buffett does and how he made his money.


or maybe they do ,and you don't...

ever even consider that?

[Anonymous No.1472256]

>>1467974
this.
the guy who owns it worked with TD.
TD is in cahoots with Hillary.
they have some serious money to do the studies with

[Anonymous No.1472558]

>>1472215
He only does m&a because he's got too much money to bother buying minority stakes in undervalued companies (generally they're of the smaller end of the market)

[Anonymous No.1472565]

So basically what I get from this thread is you people are telling me people only fuck up in really making it as an investor because they don't have patience and are only trying to get rich quick?

[Anonymous No.1472578]

>>1472558
>He only does m&a because he's got too much money to bother buying minority stakes in undervalued companies
This is 100% false.

1. BRK does do some trading in minority stakes. If you bothered to read their financial statements before posting bullshit that you pulled out of your ass, you'd know that their trading division is profitable. However, its a very small portion of their overall portfolio.

2. BRK does acquisitions because Buffett's team sees opportunities to bring added value to BRK's portfolio companies. Whether its divestiture of underperforming divisions, reformation of compensation structures, or integration (horizontal or vertical) with related businesses, Buffett uses his control position or major shareholder position to effectuate value-generating changes in the companies he purchases. Very, very rarely does Buffett buy a company and not tinker in some degree with operations, strategy or management.

3. There are value opportunities at all capitalization levels. To claim that "generally they're of the smaller end of the market" is pure presumption. While there are more smaller companies, and perhaps a greater number are value candidates, that's offset by the larger dollar value of larger prospects.

4. Besides, smaller value targets are EASIER to acquire than larger ones anyway. Your logic is 100% backwards.

This "too big to profit from" meme needs to die.

[Anonymous No.1472586]

>>1472578
>This "too big to profit from" meme needs to die.
Have you seen the p/e ratios of big companies man?
The only ones with a low pe are airlines and they're just shit. Its not that you can't profit from them per se, its more that the margin of safety a value investor looks for just isn't there.

Also you should use your trip ihaz so I don't have to see your posts.

[Anonymous No.1472602]

>>1472586
>The only ones with a low pe are airlines and they're just shit.
And this is why you'll be successful at M&A.

Which is fine, because it's not like you'd ever have the capital, backing, resources, intelligence, investors, underwriting, or skill to even try. Stick to alt coins kid. You'll surely get rich some day!