PMs/ experienced asset managers, how confident are you really that you will beat the market/earn decent returns?
I'm trying to understand how much uncertainty there really is in the market for someone with lots of training, lots of experience, and good judgement.
Do you go into your office thinking: "I'm reasonably confident I will be hitting my target returns as long as nothing crazy happens..." or is it more like "Though my team and I do the best analysis we can, we REALLY are at the whims of markets" or anywhere in between?
Do markets become more and more predictable the more training and/or experience one gains? Is there an upper bound and if so, where is the upper bound?
interested also.
Most are confident and most are wrong. Read this post and view the extreme confidence in the prediction. http://www.wallstreetoasis.com/blog/tsla-taxpayers-stuck-with-lifeless-…
Notice all of the facts and how well thought out the thesis seems?
Then go check a recent stock price.
Granted, this isn't written by some PM with tons of experience, but it's basically the same mindset for most people that pick stocks for a living.
Also you would expect to be wrong on a lot of your pick given even getting it right 60pc I the one is doing pretty well...
"The market can remain irrational longer than you can remain solvent."
Maybe the word "wrong" is a little assuming, but I don't think that the sentiment is wrong at all.
I might agree with you in certain instances, but not when someone has shorted a stock that's up 400% in less than a year. The fund investors are feeling the pain of that decision now.
I am reasonably confident over a reasonably large sample, but have zero expectations for a particular single period of time.
Great statement. Haven't heard it before.
The more successful managers realize that they don't have any control on how their investments work out. It could be a few years before your some of their best ideas work out. There's not much you can do in terms of performance when your a long-only guy and an '08 comes along. All you can do is buy and wait.
Could you elaborate on other managers and your reasoning about being confident over a large sample. What kind of HF are you in btw? im guessing different than L/S?
My reasoning is based on my view (possibly incorrect) that my investment methodology generally produces superior risk-adjusted returns, after transaction costs. I have reasons to believe that my view is more than just wishful thinking. However, like any other market participant, I have no way of guaranteeing that at any given moment in time my portfolio won't experience a drawdown.
I do interest rates (fixed income and FX, mostly), with a predominantly relative value focus.
One thing I'd like to add is that the idea that one can easily outperform the index because of "optionality" is absurd.
I meant to comment on this comment by Martinghoul earlier. In my opinion, this is the best possible response by someone who manages money for a living. This is analogous to card counting, on any given hand, the edge is barely noticeable, but over time, the odds are good for outperformance. Now, I don't know Martinghoul or if he's any good (obviously, I've never even met him or know anything about him), but at a minimum, he has a humble enough attitude to counteract the tendency for people to be overconfident. Overconfidence has been the root cause of every major investing blowup that I know about. In reading some of his other posts, i believe this guy consistently displays the right attitude about managing money.
PS -- this attitude is a good thing, but, even with the best attitude, this business is very difficult. Everyone you buy from is selling for a reason, maybe it's not the same reason that you're buying, but it's important to keep in mind, that virtually nobody who trades in size is a dumb person in 2013.
From a fixed income perspective, it's pretty fucking easy. Like... If you have a diversified portfolio and can't beat the Barclays agg or whatever benchmark you're using, you're a pretty shitty trader..
Think of it this way - as an active trader/PM you always have an advantage over indices because you have optionality, right? Optionality has value, so your base case shouldn't be the index, it should really be the index plus the implied derivative. Since the value of the derivative is a positive non-zero number, the value of the index plus the derivative is greater than the value of the index on a standalone basis, so base case you should beat the index.
Base case you should beat the market, pretty much by definition.
Huh? If it's so easy for a fixed income manager to outperform, then why do almost no fixed income managers (properly benchmarked) actually beat the Barclays Agg? What optionality does a manager have that the index does not? What you're writing makes no sense.
Most people consider high grade fixed income the most difficult asset class to be an outperformer.
Define "properly benchmarked." Do you really believe that "almost no fixed income managers beat the agg?" Let's use our brains for a couple seconds and just logic through this. Think of all te NIM businesses in the world - banks, funds, insurance... Those guy are all buyers of fixed income to match against their liabilities, right?
Naturally, based on like "accounting 101: intro to not being fucking retarded" level shit, your balance sheet has two sides. Economic theory would predict that the sellers of the liabilities/purchasers if funding would bid up the cost of funds to the point where they would be indifferent trading it not, which arguably could be their book yield minus some dr minimus epsilon. So if you're assuming they can just buy the agg, you're assuming they can get paid the agg returns, which sets a floor on their total returns, so theoretically cost of funds should be bid up to that floor.
So if you're going to try to argue that NIM businesses underperform the agg (and by extension their cost of funds) as a rule, aren't you kind of arguing that like... Banks and insurance companies are insolvent on a massive global scale? Because like... If you fund trades at the agg and can't beat the agg you've got negative margin right?
So yeah, I disagree with you and stand by my theory that the optionality of an actively managed portfolio has value in and of itself which makes actively managed portfolios inherently more valuable than indices because you have this like, free call essentially,
As far as your high grad fixed income point, there's a huge difference between the universe if fixed income securities and the universe of OF corporates. Performance of IG corporates is not necessarily meaningful to my point about the broader world of fixed income.
And just anecdotally, I'm a fixed income manager and I'm pretty sure I would get fired if I were consistently outperformed by the agg. We all beat it as a rule.
Studies suggest that most active managers don't have enough actual investment skill to cover their costs, they stay afloat through luck...
Courtesy of the good ol' Fama-French paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1356021
This is so wrong.
I don't even know where to begin.
Ha - and the sky is green. Opinions are like assholes, right? Anyone cam say whatever they want, but if you cant back it up with any kind if argument its irrelevant. If you've really got a lot to say, you should respond for my benefit and the benefit if anyone else reading this.
I've already learned that munis are excluded from the agg, right? maybe I'll learn something else. As of now I still believe in my major points.
Guess ill start from the top.
First of all it's incredibly different to best the benchmark. A good year constitutes beating the benchmark by 200 basis points (2.0%). You do this every year for 3 years and you're a rock star.
Your argument about optionally is incorrect and logically flawed. I don't really understand it.
If there's some "positive implied derivative", a free lunch, then I'd like to know how to get that.
There are hundreds of taxable munis in the agg...
all the big names get their money out of their influence and cornering the market etc.
If the agg is the average performance of all securities--and thus the average capital-weighted performance of all institutions who own securities (before fees)--then surely half must win and half must lose relative to the index, since it must tautologically be the average. Not sure I quite understood the whole bit about optionality etc. But if what the 'fixed income PM' says with regards to ALM management in FI markets is that some players make 'dumb' trades to match liabilities, then maybe he thinks 'optionality' is what lets them take the other side of it. Still, if alpha relative to a benchmark is zero-sum, all this seems to make no sense. The "obvious" trends...if only the clairvoyance came to us all. Until then beating the market will be the half-gamble, half-race that it is
Average Median, so the 50% under/over performing claim isn't necessarily true.
E.g. could have fewer players really outperforming, exactly offsetting a larger pool of players slightly underperforming.
Not to be a dick but this is 1) True and 2) The reason for the last financial crisis. IG Corporates are closer to Govt and Munis. Fundamental HY Corporate can get very close to Fundamental equity.
For instance, NYCbandar...how obvious was the Fed's prolonging of QE last week? Surely you positioned your portfolio in advance of the inevitable and laughed at those who didn't
Great thread
Bandarji ne DickFuld ki faad di :D
unhedged every single year
I love this thread :)
apologies to others in the thread, didn't bother to read your responses. I'd recommend everyone interested in this read books about handicapping, poker, the kelly criterion, etc., such as fortune's formula by william poundstone. we use target returns, and we aim to be a few percentage points ahead of inflation with half the vol of the s&p. there is tons of uncertainty in the marketplace, but you simply try to minimize your mistakes. in my mind, the best way to do this is to be a value guy with a contrarian tilt. the reason is that markets will always be irrational, ever since markowitz and fama came on the scene pre-vietnam, people have been trying to make finance and economics into a hard science like bio, chem, or physics, where the rules are written in stone. in financial markets, you have real people, emotions, attitudes, different goals, etc. because of this, most finance teachings (emh, mpt, capm) in college and even CFA are wrong. if you have a large pool of irrational and shortsighted people making decisions with money, sooner or later, and more often than not, they will be wrong. it is at that point you can make money consistently, and at no other time. I'm not saying that value investing and being contrarian are the ONLY ways to make money, I just believe they're the only ways to make money consistently. you could have made money buying TSLA & NFLX at the IPO, just like you could've made money buying yahoo in 96 and selling it december 99, but these situations are not only few & far between, their results are detached from their fundamentals. to answer your question directly, I do not concern myself with uncertainty in the marketplace, I focus on what I can control. I can control the level of risk I am taking, I can control the quality of companies I select, and I can control the margin of safety I allow. if I do all of those well, I am confident I will beat the goals I have for the portfolio (we don't try to "beat the market," because in our case it's apples & oranges). regarding your question about markets becoming more predictable, always remember that the more things change the more they stay the same. people will always be irrational, they will always say "this time it's different!" and this will always leave opportunity for those who are patient and liquid. as you gain experience, you gain wisdom, patience, and hopefully liquidity.
Is your enter/return key broken?
As for your post, I fully agree but do not possess sophisticated training.
Haha nah not broken I just don't pay attention to grammar on a forum where "throw monkey shit" is an option, appreciate your kind words though
Did you beat the market and hedge funds? (Originally Posted: 04/14/2010)
Q1 returns...
FTSE 4.9% S&P 5.4% Dow 4.8% Nasdaq 5.9%
I returned 5% in one portfolio and 10% in another... so one portfolio was in-line and the other beat the market by 5%.
Would be interesting to know how others did (if people invest at all)...
Below are top 10 returns YTD by hedge funds from AlphaClone... clearly I underperformed these gurus...
Second Curve Capital 47.7% Third Point 44.2% Fine Capital Partners 40.4% Appaloosa Management 38.3% Canyon Capital Advisors 32.0% Diamondback Capital Management 31.7% King Street Capital 30.3% Blum Capital Partners 29.9% Watershed Asset Management 29.7% Harbinger Capital Partners Special Situations 29.3%
wow. daniel loeb and david tepper are crushing it.
They should just take a vacation for the next 9 months.
what was your beta?
*alpha
is alphaClone legit?
www.gurufocus.com
another site where u can access more for free
i really like this site, thanks so much juklano. appreciate it :)
I'd say, what was your Sharpe ratio.
too much detail guys... you're missing the point. forget sharpe ratios and alphas... trying to be a smartass is great in the office but not needed here, as i never asked for this!
just asked for a basic return. (i.e. ending price / beginning price - 1)... out pops a percentage.
you are correct in saying alpha is a good way to see the risk-adjusted return compared to the index but not needed here...
Well the topic was did you outperform the market, hedge funds etc. If your return was higher than the market because you took on much more risk then you didn't outperform anything. I'd like to see a nice clean sharpe ratio to go with the returns...not asking too much.
"Harbinger Capital Partners"
haha a little bit morose, even for a hedge fund.
Thanks for the mentions everyone. The stats posted above seem like they are for the Top 3 Holdings strategy for each of those managers. That strategy invests in the three largest positions disclosed by the manager each quarter. Free guest pass members can view backtests for that strategy as far back as 2000 and for any manager (e.g., Berkshire, exc). You guys might want to check out our blog as well - it can help folks understand our service better http://blog.alphaclone.com. BTW, the portfolio's volatility (ie beta, sharpe, standard deviation) is relevant especially when a portfolio holds relatively few stocks (like the Top 3 Holdings strategy). Our platform allows you to backtest about a dozen strategies for any of 300 managers, you can even combine managers into groups (fund of funds) and "clone" their collective intelligence http://blog.alphaclone.com/alphaclone/fund-groups-collective-intelligen…
Investing in Stocks: Factors to Consider In Order to Beat the Market (Originally Posted: 02/19/2018)
Many people try to find the next wonder stock- the next Home Depot or Dell that will multiply their investment by many times.
According to this article by the Economist, there are four or five long-established factors that seem to make shares perform differently from the rest of the market: size, value, yield, low volatility, and momentum. The first of these is based on the fact that small companies have tended to outperform large ones. “Value” refers to companies that look cheap relative to their assets, which have tended to beat those that look expensive. “Yield” means shares with a high dividend yield, which do better than those with a low yield (though that may be just another version of the value effect). “Low volatility” means those shares that move less violently than the overall market, which also tend to perform better than the average. Finally, “momentum” seeks to profit from the observation that shares which have risen in the past continue to do so.
In the book Intelligent Investor, Graham recommends these factors for the defensive investor:
Nowadays, “to exclude small companies,” most defensive investors should steer clear of stocks with a total market value of less than $2 billion.
Graham’s criterion of financial strength still works: If you build a diversified basket of stocks whose current assets are at least double their current liabilities, and whose long-term debt does not exceed working capital, you should end up with a group of conservatively financed companies with plenty of staying power.
So Graham’s insistence on “some earnings for the common stock in each of the past 10 years” remains a valid test-tough enough to eliminate chronic losers, but not so restrictive as to limit your choices to an unrealistically small sample.
As of early 2003 according to S&P’s, 354 companies in the S&P 500 (or 71% of the total) paid a dividend. No fewer than 255 companies have paid a dividend for at least 20 years in a row.
How many companies in the S&P 500 increased their earnings per share by “at least one third,” as Graham requires, over 10 years ending in 2002? (We’ll average each company’s earnings from 1991 to 1993, and then determine whether the average earnings from 2000 through 2002 were at least 33% higher.) According to Morgan Stanley, 264 companies in the S&P 500 met the test. But here, it seems, Graham set a very low hurdle; 33% cumulative growth over a decade is less than 3% average annual increase. Cumulative growth in earnings per share of at least 50%-or a 4% average annual rise-is a bit less conservative. No fewer than 245 companies in the S&P 500 index met that criterion as of early 2003.
The prevailing practice on Wall Street today is to value stocks by dividing their current price by something called “next year’s earnings.” That gives what is sometimes called “the forward P/E ratio.” But it’s nonsensical. Over the long run, money manager David Dreman has shown, 59% of Wall Street’s “consensus” earnings forecasts miss the mark by a mortifyingly wide margin, either underestimating or overestimating the actual reported earnings by at least 15%. Instead, calculate a stock’s price/earnings ratio yourself, using Graham’s formula of current price divided by average earnings over the past 3 years.
*In recent years, an increasing proportion of the value of companies come from intangible assets like franchises, brand names, and patents and trademarks. Since these factors (along with goodwill from acquisitions) are excluded from the standard definition of book value, most companies today are priced at higher price-to-book multiples than in Graham’s day. According to Morgan Stanley, 123 of the companies in the S&P 500 (or one in four) are priced below 1.5 times book value. All told, 273 companies or (55% of the index) have price-to-book ratios of less than 2.5. What about Graham’s suggestion that you multiply the P/E ratio by the price-to-book ratio and see whether the resulting number is below 22.5? Based on data from Morgan Stanley, at least 142 stocks in the S&P 500 could pass that test as of early 2003. So Graham’s “blended multiplier” still works as an initial screen to identify reasonably-priced stocks.
However, before Graham's death he says,
Many people continue to search for the magic formula to beating the market. There is no obvious way to beating the market. If there was and everyone knew about it, the supposed magic formula would create average returns.
Hey monkeys, how do you select your stocks? What factors do you consider? Do you agree with Graham's quote?
Diversification is for losers
Beating the stock market (Originally Posted: 12/04/2012)
Any new investor is quickly exposed to the concept of beating the market. It seems the industry is obsessed with this goal. Fund managers are paid their bonuses on relative performance to the market. Individual stocks are often displayed on a graph in comparison to the general market... It is backbone of the investment industry!
Why the industry is obsessed with beating the market: Consider the fact that without beating the market, a fund manager provides NO VALUE ADD. Why would I pay someone 2% management fee to "match" the market. Hence the industry designed this rule to help sell their investment services. However, it is important to understand that the market is comprised of a collection of stocks which in aggregate make up the broader economy.
For instance, Coke and Pepsi make up the "soda beverage market". The overwhelming majority of soda products are made by those two companies and therefore make up "the market" for this small sub-segment of the economy. Both these companies are fanstastic with a strong management team, tremendous brand, global distribution capabilities, etc.
Beating the job market: If a recent MBA grad were to land a job at Coke paying $85k base, I'd say he's doing very well. Anotherwords, Coke is a competitive organization that offers "market" compensation and competitive career progression, etc. From all his peers, he is as lucky and successful as those who landed a job at Pepsi, Disney, P&G, etc.
Now assume that his twin brother also recently graduated from the same MBA program. But he isn't happy with a "market" opportunity. The average starting salary for his MBA program is $85k but he decided its not enough. Indeed he wants to beat the market. Therefore, he turns down the same $85k job at Coke. Instead, he locks himself in his basement for 5 years attempting invent a "better" soda beverage. After 5 years of effort, he succeeds at inventing a tasty beverage but he doesn't have the scale, size or funds to expand his business properly. Even if he does succeed at building a profitable business, its never going to reach 0.01% of the size of Coca Cola.
Now lets fast forward 20 years. The first twin never really beat the market. He gradually got promoted in the Coke organization. His pay increased by a reasonable amount every 1-2 years. After 7 years of middle management at Coke, he got a job offer to be an executive at Pepsi and accepted the offer. At the 20 year mark, he is a very happy and successful business man. Someone that everyone admires. He was able to accomplish this result because he understood that the market is fair and will have its ups and downs. You just have to roll with the punches and put in your time. In contrast, the 2nd twin spent 20 years trying new businesses. Some worked and some didn't. Eventually, no big company was willing to hire him because all those faied business attempts don't look good on his resume.
The same logic applies to owning Coke/Pepsi stock. If you like a the beverage market, you should strive to own the best companies in that industry. They have the best economies of scale, brand and global reach. Their excutives make top dollar to sit and think of ways to grow the company and make it more profitable. These executives aren't stupid. Over time, they will find ways to grow the bottom line. The solution is to own BOTH Coke and Pepsi and just let the beverage market work in your favor. Let these massive companies accumulate dividends for you and aid in your retirement objectives.
Therefore, unless you are absolutely sure that a particular small cap stock has some competitive advantage or is extremely undervalued, I suggest that you do not attempt to "beat" the market the same way that most of us accept that there is little value in attempting to "beat" the job market. If you stay the course for 20 years, the market will reward you handsomely.
very insightful....
Using that logic, I should just quit Wall Street and try to get into a comfortable government job.
I think you missed the point. The job thing was just an analogy for the stock market.
He is pretty much saying it is far better in the long-run to buy PG stock, then to buy lnkd and fb's of the world.
You could find the next aapl but the odds are against you.
Dumb advice.
with this quality of work and insight OP will resemble the 2nd twin more than the first
Just covered the efficient market hypothesis in class today. I'll be opening a Roth in the next month or so, is it a bad idea to start with a few solid dividend paying stocks?
Studies have shown over the past 70 years that only about 10 percent of money managers have beat the market in any given 10-year period.
so put your money in a low cost total market index fund and call it a day :\
Tenuous analogy.
the third twin (aka triplet) dropped out of MBA school, spent a couple months inventing some instagramesque app which sold for $500mm.
then he took a dump on the other brothers' lawns and went back to his penthouse to get high with his playmate girlfriend
yes beta exposure is more important than generating alpha
This logic of buying brand companies is obsolete. At a low enough price everything is attractive. Are you really a 2nd year corp fin associate? I thought you were first year undergraduate.
This thread reminded me of this article by William Sharpe.
http://www.stanford.edu/~wfsharpe/art/active/active.htm
However, I have to admit that I did not follow your logic towards the end.
Algorithmic Strategy that BEATS THE MARKET (Originally Posted: 11/29/2010)
An engineering student from Berkeley has developed an alogorithmic trading strategy that can predict the S & P 500's price action with 60-70% accuracy depending on the parameters used. This is the link to his paper: http://www.eecs.berkeley.edu/Pubs/TechRpts/2010/EECS-2010-63.pdf
My question is, if this is true that his strategy works, then why the fuck would he publish the results. Why not just start a fund based on the use of these strategies and rack in the cash? Either this guy just doesn't care about money, or the system doesn't actually work and the paper is just academic bullshit. It doesn't make any logical sense. In the back of my mind I'm really thinking this can't be true because then, this guy would have to NUTS to publish this paper. But how could it not be true if he was shown that it is true with mathematical proof. If backtesting it more would show it isn't true then why wouldn't he backtest it more. Any self respecting quant analyzing his work would realize that he hasn't backtested it enough and dismiss it right away, so if his goal is to gain repect or prestige in the industry then he wouldn't achieve that either.
This doesn't make a whole lot of sense...
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