Things I like about New Year's Eve:
The [insert pop culture item here] Year in Review lists.
Bowl games!
Tomorrow = holiday and more bowl games!
Guilt free consumption of food and beverages.
Things I don't like about New Year's Eve:
Drunks.
The cold.
Tax season starts again the next day.
It will be 5 months to the next holiday weekend. (Unless you are a civil servant in which case you get a holiday weekend roughly every four weeks of the year!)
Thursday, December 31, 2009
Saturday, December 26, 2009
More Evidence On The Failure Of Active Investing
From an article in the 12/3/2009 Wall Street Journal on a study done by two of the world's smartest academics in field of investing:
It's impossible to tell whether actively managed funds that beat the market do so out of luck or skill, according to a new study by the professors who've championed passive/index investing for years.
The claim means that investors can't know for sure how good their active manager is, say the professors, Eugene Fama and Kenneth French. The latest Fama-French study is another piece of ammunition to support their view that most active managers can't consistently beat [passively managed] funds, which track the market. Underpinning that is the efficient-market hypothesis, developed by Mr. Fama in the 1960s, that states that assets are appropriately priced since the market has all available information.
Mr. Fama and Mr. French, professor of finance at Dartmouth College's Tuck School of Business, ran 10,000 simulations of what investors could expect from actively managed funds.
This was based on data for 3,156 stock funds from January 1984 to September 2006. They found that outside the top 3% of funds, active management lags behind results that would be delivered due simply to chance.
The study, "Luck Versus Skill in the Cross Section of Mutual Fund Returns," included mutual funds that were liquidated and any fund launched before September 2001 that reached more than $5 million in assets. (Find a copy of the report at the Social Science Research Network.)
"The simulations tell us that for the vast majority of actively managed funds, true [abnormal expected return] is probably negative; that is, the fund managers do not have enough skill to produce risk-adjusted expected returns that cover their costs," wrote the professors.
The fact that some funds in the professors' study beat the simulations does suggest that by picking the right funds investors can consistently outperform the market. But there's just one problem, according to the professors: The "good funds are indistinguishable from the lucky/bad funds that land in the top percentiles."
Given this evidence, why do most investment advisors continue to use actively managed funds? I covered this in an earlier blog (http://streffblog.blogspot.com/2009/10/simple-yet-inevitable-wealth-creation.html), but in short, it's because that's how they get more of your money.
MORAL: Only use advisors who believe in the passive/index approach.
It's impossible to tell whether actively managed funds that beat the market do so out of luck or skill, according to a new study by the professors who've championed passive/index investing for years.
The claim means that investors can't know for sure how good their active manager is, say the professors, Eugene Fama and Kenneth French. The latest Fama-French study is another piece of ammunition to support their view that most active managers can't consistently beat [passively managed] funds, which track the market. Underpinning that is the efficient-market hypothesis, developed by Mr. Fama in the 1960s, that states that assets are appropriately priced since the market has all available information.
Mr. Fama and Mr. French, professor of finance at Dartmouth College's Tuck School of Business, ran 10,000 simulations of what investors could expect from actively managed funds.
This was based on data for 3,156 stock funds from January 1984 to September 2006. They found that outside the top 3% of funds, active management lags behind results that would be delivered due simply to chance.
The study, "Luck Versus Skill in the Cross Section of Mutual Fund Returns," included mutual funds that were liquidated and any fund launched before September 2001 that reached more than $5 million in assets. (Find a copy of the report at the Social Science Research Network.)
"The simulations tell us that for the vast majority of actively managed funds, true [abnormal expected return] is probably negative; that is, the fund managers do not have enough skill to produce risk-adjusted expected returns that cover their costs," wrote the professors.
The fact that some funds in the professors' study beat the simulations does suggest that by picking the right funds investors can consistently outperform the market. But there's just one problem, according to the professors: The "good funds are indistinguishable from the lucky/bad funds that land in the top percentiles."
Given this evidence, why do most investment advisors continue to use actively managed funds? I covered this in an earlier blog (http://streffblog.blogspot.com/2009/10/simple-yet-inevitable-wealth-creation.html), but in short, it's because that's how they get more of your money.
MORAL: Only use advisors who believe in the passive/index approach.
Monday, December 14, 2009
Tiger And His Mistresses (Allegedly)
I golf. I watch TV. And sometimes I watch Tiger Woods golf on TV. This absolutely qualifies me as much as anybody to blog about the Tiger Woods affair. (No pun intended.)
Let's first get the obvious out of the way. Tiger has become a morally bankrupt person, as it seems are many other celebrities and politicians. Apparently this is what fame and fortune does to some people - it corrupts them to the point they think they can do anything with little or no accountability. They lose their moral compass, if they had one to begin with. Tiger is a dispicable person.
That said, there is at least one angle to the story that I think has been under-covered by the media, related to Tiger's many alleged mistresses. Specifically, if their allegations are true, then why aren't they being called out for their part in all of this? They're getting a lot of attention, but not much disdain. They knew Tiger was married, and more recently with children. Why didn't they just say no?
Because they are whores.
Literally, Merriam-Webster's dictionary defines a whore as 'a promiscuous or immoral woman' and 'a venal or unscrupulous person'. And literally, some of his alleged mistresses were adult film stars. Either way, the definition fits.
Let's get real - these aren't nice girls. They don't say no. It's their job to profit from others' fame and fortune. They might end up selling their story, or better yet, have an illegitimate child and then they've really got it made. They might be called many other names, but they are, accurately, whores.
Saying this doesn't make Tiger a better person. Saying this doesn't make what Tiger did right. But saying this does put some perspective on the kind of people - immoral people - Tiger hung with. (This time, pun intended!)
Let's first get the obvious out of the way. Tiger has become a morally bankrupt person, as it seems are many other celebrities and politicians. Apparently this is what fame and fortune does to some people - it corrupts them to the point they think they can do anything with little or no accountability. They lose their moral compass, if they had one to begin with. Tiger is a dispicable person.
That said, there is at least one angle to the story that I think has been under-covered by the media, related to Tiger's many alleged mistresses. Specifically, if their allegations are true, then why aren't they being called out for their part in all of this? They're getting a lot of attention, but not much disdain. They knew Tiger was married, and more recently with children. Why didn't they just say no?
Because they are whores.
Literally, Merriam-Webster's dictionary defines a whore as 'a promiscuous or immoral woman' and 'a venal or unscrupulous person'. And literally, some of his alleged mistresses were adult film stars. Either way, the definition fits.
Let's get real - these aren't nice girls. They don't say no. It's their job to profit from others' fame and fortune. They might end up selling their story, or better yet, have an illegitimate child and then they've really got it made. They might be called many other names, but they are, accurately, whores.
Saying this doesn't make Tiger a better person. Saying this doesn't make what Tiger did right. But saying this does put some perspective on the kind of people - immoral people - Tiger hung with. (This time, pun intended!)
Monday, December 7, 2009
Active Investing Is Worse Than Gambling
You wouldn't know it by the number of people who gamble, but most gamblers know that the odds are stacked against them. The house is always favored. But even though most people are going to lose, they still gamble because it's exciting, and hope springs eternal.
This same concept applies to active investing (ongoing market timing and stock picking), except that people don't realize the odds are stacked against them. Little do investors know that the 'house' - their commission-based reps and the financial services firms and funds for which they work - is always favored due to the structure of the expenses they charge.
In a way, active investing is worse than gambling - at least the risks to gamblers are obvious. But active investors assume (wrongly) that past performance should be an indicator of future performance. Imagine a coin flipper landing on heads 75 out of 100 times. Gamblers know that is 'luck', but for active managers that means a solid 'performance'. In truth, that does not mean the next 100 flips will have the same outcome, and stock pocking performance has been shown to be similiar.
So why do people keep utilizing active investing with commissioned brokers? Same as why people keep gambling - it's exciting (more than buy-and-hold) and hope springs eternal. But there's another reason - they don't know there is another way to invest besides the traditional financial services model. [See prior posts.]
There is another way. Take the fee-based passive approach. It levels the playing field. It makes investing more than just a roll of the dice. It's a proven winner.
Don't be a sure loser - don't gamble with your money by partaking in the traditional active model.
This same concept applies to active investing (ongoing market timing and stock picking), except that people don't realize the odds are stacked against them. Little do investors know that the 'house' - their commission-based reps and the financial services firms and funds for which they work - is always favored due to the structure of the expenses they charge.
In a way, active investing is worse than gambling - at least the risks to gamblers are obvious. But active investors assume (wrongly) that past performance should be an indicator of future performance. Imagine a coin flipper landing on heads 75 out of 100 times. Gamblers know that is 'luck', but for active managers that means a solid 'performance'. In truth, that does not mean the next 100 flips will have the same outcome, and stock pocking performance has been shown to be similiar.
So why do people keep utilizing active investing with commissioned brokers? Same as why people keep gambling - it's exciting (more than buy-and-hold) and hope springs eternal. But there's another reason - they don't know there is another way to invest besides the traditional financial services model. [See prior posts.]
There is another way. Take the fee-based passive approach. It levels the playing field. It makes investing more than just a roll of the dice. It's a proven winner.
Don't be a sure loser - don't gamble with your money by partaking in the traditional active model.
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