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Old 08-04-2008, 09:19 PM   #21
jay santos
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Originally Posted by pelagius View Post
I'm afraid this is getting silly:

BYU71: ex post outperformance

JAY: ex ante outperformance

Jay, unfortunately didn't make that distinction clear at the beginning but the by the middle of the thread he is clearly is making an argument about ex ante performance and not ex post. A charitable reading of Jay's argument requires that you respond in terms of the ex ante probability of overpeformance.
My original post said that someone making that claim is dishonest or incompetent. A clarification would be that even if someone can show an ex post performance beating the market, they are dishonest or incompetent if they try to con you into thinking they can continue to do so.
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Old 08-04-2008, 09:25 PM   #22
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Instead of S&P I should have said a portfolio managed through modern portfolio theory--using index funds for each category--something as simple as:

50% Domestic (break out by large value, large growth, small value, small growth if you have enough to make it worth it)
30% International (ditto)
10% Real Estate/Commodities
10% Bonds

And I don't believe it's possible to beat it long term after costs. Long term = 30 - 50 years since that's the investment horizon for most on this board (should be time to death not time to retirement which is a big mistake some make).

I should say it's probably possible to beat this strategy long term after costs

BUT

the risk and probability of choosing the wrong portfolio manager is far greater than the reward you'll get above the index fund approach.

P.S. Five year returns mean ABSOLUTELY nothing to me. And ten year returns don't mean much to me at all.

I have discussed the modern portfolio theory with someone in the investment world I have learned to respect a great deal. He showed me all sorts of facts and figures that indicated the modern portfolio thoery is bogus and meant for intellects to mentally masterbate with. However, to each his own and if someone wants to use that method, I would say go ahead.

I have found a lot of methods will work if they are stuck too. Emotion is the one element that comes in and messes with returns.

It is a proven fact investors in mutual funds do far worse than the funds they invest in. Why, it would be my contention they get in and out at the wrong times, because of emotion. I call it the "I can't take it any longer theory". I can't take seeing my investments go down in value any longer and therefor get out. Or, I can't take seeing the market go up any longer without me in and so they get in.

One thing I will agree with you on. I suspect you are saying don't put all your eggs in one basket. I would agree with you there.
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Old 08-04-2008, 09:31 PM   #23
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I suspect you are saying don't put all your eggs in one basket. I would agree with you there.
Since this is the major implication of portfolio theory doesn't it suggest you are engaging in or buying into the importance of mental oil changes ...

P.S.

I would not got around condemming portfolio theory ... address a specific weakness but don't engage in some silly characterization based on meeting a smart guy who didn't like it.
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Old 08-04-2008, 09:36 PM   #24
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Originally Posted by jay santos View Post
My original post said that someone making that claim is dishonest or incompetent. A clarification would be that even if someone can show an ex post performance beating the market, they are dishonest or incompetent if they try to con you into thinking they can continue to do so.
Its too strong of a statement; the advisor may just be overconfident. There is lots of empirical evidence consistent with fund managers and people in general being overconfident (i.e., they overstate the probability they are correct).

I wouldn'tnecessarily think badly of Waters friend. I am not privy to the whole conversation. Its possible he had a very nuanced discussion of risk and expected returns and Water's summary leaves something to be desired. I don't know ... more information would be required before I made the inference the Waters should avoid investing with him.
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Old 08-04-2008, 09:38 PM   #25
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Since this is the major implication of portfolio theory doesn't it suggest you are engaging in or buying into the importance of mental oil changes ...

P.S.

I would not got around condemming portfolio theory ... address a specific weakness but don't engage in some silly characterization based on meeting a smart guy who didn't like it.
Reread what I wrote, not what you want me to have meant. I mentioned someone else condemned the theory, I indicated others could use it if they choose.

I was suggesting, maybe not clearly enough diversification. Diversification could mean a portfolio of large cap value, large cap growth, small cap value, small cap growth and an international blend.

You wouldn't have to have bonds, real estate, commodities, etc. to be diversified as you probably would have to have those in order to be following the portfolio theory.

Anyway, I find diversification is enough of a mental oil change without moving onto diversification on steroids in order to get a mentally chanllenging oil change.

To each his own though. I personally would not condemn someone if the chose the "theory" as their discipline to invest by. My advice would be stick to it and don't switch with every new theory you here.

As for "genius investors". Those folks give us long term capital, over the counter bubbles and sub-prime. The first genius I encountered was Michael Milliken (sp) who gave us Junk bonds.
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Old 08-04-2008, 09:55 PM   #26
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Reread what I wrote, not what you want me to have meant. I mentioned someone else condemned the theory, I indicated others could use it if they choose.
No you took a swipe. You said a person you respect a great deal called it mental masturbation and you found it convincing ... That's a bit of swipe.

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I was suggesting, maybe not clearly enough diversification. Diversification could mean a portfolio of large cap value, large cap growth, small cap value, small cap growth and an international blend.

You wouldn't have to have bonds, real estate, commodities, etc. to be diversified as you probably would have to have those in order to be following the portfolio theory.
I am fine with your first paragraph ... It may be entirely consistent with portfolio theory depending on the preferences of the investor. I think you may be arguing against a version of portfolio theory that is oversimplified and taking a stylized version too literally.





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As for "genius investors". Those folks give us long term capital, over the counter bubbles and sub-prime. The first genius I encountered was Michael Milliken (sp) who gave us Junk bonds.
LTCM was clearly not following portfolio theory ... it may be an interesting example but it can hardly be used to condemn portfolio theory.

Last edited by pelagius; 08-04-2008 at 10:02 PM.
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Old 08-04-2008, 10:00 PM   #27
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Its too strong of a statement; the advisor may just be overconfident. There is lots of empirical evidence consistent with fund managers and people in general being overconfident (i.e., they overstate the probability they are correct).

I wouldn'tnecessarily think badly of Waters friend. I am not privy to the whole conversation. Its possible he had a very nuanced discussion of risk and expected returns and Water's summary leaves something to be desired. I don't know ... more information would be required before I made the inference the Waters should avoid investing with him.
overconfident = a form of incompetence. no?

I'm being overly aggressive in this thread but it's to balance what I perceive the vast majority of being way too far on the trusting side of "investment advisors".
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Old 08-04-2008, 10:06 PM   #28
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No you took a swipe. You said a person you respect a great deal called it mental masturbation and you found it convincing ... That's a bit of swipe.



I am fine with your first paragraph ... It may be entirely consistent with portfolio theory depending on the preferences of the investor. I think you may be arguing against a version of portfolio theory that is oversimplified.






LTCM was clearly not following portfolio theory ... it may be an interesting example but it can hardly be used to condemn portfolio theory.

A "swipe" is not a condemnation, let alone a "bit of a swipe".

LTCM was a swipe at supposed "smart guys" and their investing. It was meant to show "smart" and good investing do not necessarily go hand in hand. Too many let their intellect get in the way of using common sense. Of course greed takes over which is a malady of smart, dumb and average alike.

I am not arguing against "modern portfolio theory". I am saying it is one discipline that can be followed, but not necessarily "the" discipline to be followed.

Just as a closer. My favorite manager I use and showed the numbers for wouldn't be for everyone. He has some year or years in a cylce of 5 to 10 year period where he will underperform the S&P. If my client is one who gets more upset about a year of underperformance than appreciates outperformances over a longer period, I won't suggest this manager to that client. The marriage won't work.
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Old 08-04-2008, 10:13 PM   #29
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overconfident = a form of incompetence. no?

I'm being overly aggressive in this thread but it's to balance what I perceive the vast majority of being way too far on the trusting side of "investment advisors".
Yes, but itss universal incompetence ...

You have most of the ex ante implications right. It is, of course, easy to find a strategy that from an ex ante perspective that will on average outperferform the market by over 2-3%: buy a double the market ETF. Of course, its pretty risky. Controlling for risk it is very difficult to find persistence in performance particularly at that level. This is not to suggest that fund managers don't have skill but on average they charge you for that skill and after costs on average they do worse than the market. Yes, there are always some managers that outperform the market in a given period, but there is almost no persistence in the performance. Some characteristics seems to matter but only ones that are difficult to observe. For example SAT score actually matter. Managers with higher SAT scores actually outperform (relative to some risk adjustments).
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Old 08-04-2008, 10:17 PM   #30
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I am not arguing against "modern portfolio theory". I am saying it is one discipline that can be followed, but not necessarily "the" discipline to be followed.
All of your advice so far has been consistent with portfolio theory even the advice that you suggested was contrary to it. So yes you are not arguing against it. In fact as near as I can tell, broadly defined, you follow or incorporate some of its basic tenants at least occassionly.

Last edited by pelagius; 08-04-2008 at 10:24 PM.
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