Bruno Kirby, RIP
God Speed, Sir.
A few memorable tidbits of enjoyment:
"Mr. Zero knew?"
"No, I'm a writer and I know dialogue. That is particularly harsh."
"Baby Fish Mouth!"
"I also wrote 'pesto is the quiche of the eighties.' "
A few memorable tidbits of enjoyment:
"Mr. Zero knew?"
"No, I'm a writer and I know dialogue. That is particularly harsh."
"Baby Fish Mouth!"
"I also wrote 'pesto is the quiche of the eighties.' "
posted by Donny Baseball at 2:14 AM
6 Comments:
they are mathematically doomed to underperformance after all the frictional costs like bid/ask spreads, commissions, tax inefficiencies and their own profits have been factored in.
It turns out that the average investor almost always under perform the index. This means that for active managers to add value, all he has to do is to keep up with the index after all costs deducted. The media is overly concerned about "beating the index". In fact, the correct benchmark, in my opinion, should be against the investor's own money management performance. If the average investor cannot beat the index, then he should hire an active manager even if the manager merely keeps up with the index (after all costs). On the other hand, if the investor could get, say 20% per year, on his own, then he should seek active managers who can beat his own performance, regardless of the performance of the index. That said, for most, the most important reason for hiring active managers, in my opinion, is to have someone to blame when things go wrong. Investing is an extremely difficult game, and most people, no matter how smart they are, cannot handle the pyschological stress of investing on their own. If a manager is skilled at providing the right psychological support, then beating the index, in my opinion, may not be important to a lot of investors.
Anyone can match the index by investing in an index fund
On paper, yes. But that is not the case in real life. Few people can just buy the index and hold for a long time. The temptation of "beating the market" is just too great for most investors to resist "tweaking" their portfolio. As a result, on average they end up underpeforming the index. This is where good money managers can add value (to the average investor) even if they are not great investors.
Couple comments: Yes, people have a difficult time sticking with a passive strategy, if they could just stick with it, it would work out fine.
I'm not sure that people want active managers so they have somebody to blame, it is more that they think their money can beat the market but are tempered by the notion that they temselves could do it. It is a good first step to realize that you probably can't do it, but it is also a necessary step (and too often not taken) to determine what it takes for someone else to do it. If you are interested, David Swensen's book talks alot about what it takes for someone to be a good active manager.
it is also a necessary step (and too often not taken) to determine what it takes for someone else to do it.
It takes lots of luck, that's for sure. The problem in screening for active managers is that you can't separate luck from skill. If a manager has a good track record, does that mean he is good, or was he just lucky? or both? How can you tell? You can't (at least I can't).
I read Swensen's book a while ago (I don't remember everything he said in the book), I recall that his approach is to be on the same side as the manager, i.e., invest only in managers that are both hungry and motivated/compensated by performance, not the size of portfolio. That's a decent approach, but hunger and compensation method obviously are not sufficient in assessing future performance.
In my view, the lack of a proper methodology (I am not sure if alpha and beta should be taken seriously) that can separate luck from skill is one of the major reasons that investors consistently give money to the wrong managers.
One good year is likely luck. Two years, still be skeptical. Three, years, start give the benefit of the doubt. And so on and so on. Long term track records are hard to explain away. Marry this with Swensen's list of qualitative factors that are predictive and you have a decent methodology for picking managers. Although it is hard to do this at the individual level.
Track record is reliable. The problem is that trends in the financial markets could last for decades. Thus, one lucky guess is sufficient to build a fantastic track record.
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