Apr 01
Can You Beat The Market?
Mark Hulbert attempts to answer the question, “Can You Beat The Market?” Hulbert uses a working paper by Kenneth French as the basis for this article. Check out Hulbert’s full article using the link below.
http://www.financialexpress.com/news/Can-you-beat-the-market-Its-a-100-billion-question/285039/
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Photograph: Big Deschutes River near Sunriver, Oregon
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April 2nd, 2008 at 10:52 am
I think French says fees are what eat up most of the returns for investors. Minimize fees to maximize returns would be my interpretation. Index funds won’t beat the market but because of buy and hold, the investor is better off because of reduced fees. That is not to say a similar method of buying holding stocks won’t obtain a similar outcome especially given the idea that 70% of the price movement is caused by the overall market. If one finds a method that beats the market, e.g. Fisher’s or Lynch’s Price to Sales, then it becomes the market. Excellent BLOG!
April 2nd, 2008 at 11:28 am
“I think French says fees are what eat up most of the returns for investors. Minimize fees to maximize returns would be my interpretation. Index funds won’t beat the market but because of buy and hold, the investor is better off because of reduced fees. That is not to say a similar method of buying holding stocks won’t obtain a similar outcome especially given the idea that 70% of the price movement is caused by the overall market. If one finds a method that beats the market, e.g. Fisher’s or Lynch’s Price to Sales, then it becomes the market. Excellent BLOG!”
Bob,
Kenneth French is pointing out that fees definitely eat into the total return of a portfolio. The Odean/Barber study, while short in years, also demonstrate that trading is hazardous to wealth building. I think I posted that study on this blog. A search for Odean will pick it up if I did.
True, an index fund, by definition, will not beat the market, particularly if the index is the market. The index will lag the market by the amount of the fees it charges.
My thesis for this Blog is that a well-diversified portfolio, built around ETFs and a few well-selected stocks will outperform a broad market index such as the VTSMX. Stated again, the VTSMX, while a good index, it is not the perfect index for the AA-Mosaic Portfolio.
Lowell
April 2nd, 2008 at 11:40 am
Lowell,
You get my vote for a few well-selected stocks.(VBG) A well-diversified portfolio surely reduces risk and using ETFs also encourages the portfolio to be passive. In my view, the hardest part and yet the least important part, is defining a index to beat. If you are happy with the portfolio’s returns and risks then I think you WIN!
Bob
April 2nd, 2008 at 12:34 pm
The most important decision an investor makes is how to allocate assets, according to Ibbotson. The Fama/French and Heartland studies back up Ibbotson’s conclusions.
Large pension funds give considerable attention to asset allocation. Small investors tend to ignore this aspect of investing. At least that is what I observe when I go over personal portfolios with those who ask for help.
Lowell
April 2nd, 2008 at 2:12 pm
Asset allocation is very important. Could it be Large pension funds are as concern with maintaining assets as they are with growing assets. I would suggest the small investor call little afford to buy all the different asset classes e.g. commodities, bonds, REITs, and ROW. Limiting investment to equities is probably as much a function of knowledge as it of goals (increasing net worth).
Bob
April 2nd, 2008 at 2:55 pm
“Asset allocation is very important. Could it be Large pension funds are as concern with maintaining assets as they are with growing assets. I would suggest the small investor call little afford to buy all the different asset classes e.g. commodities, bonds, REITs, and ROW. Limiting investment to equities is probably as much a function of knowledge as it of goals (increasing net worth).”
According to Ibbotson, asset allocation is ALL important. One hundred percent. Regardless of his prior study, I would like to see additional research take place on one hundred small portfolios where the number of asset classes number at least eight or ten.
The foundation I sit on is very interested in growing assets not just maintaining assets. We have a mandatory payout percentage of the portfolio so we must grow it or we end up “eating our own seed.”
The small investor can purchase all the necessary asset classes by using index mutual funds or ETFs. This is the beauty of such vehicles. Going the ETF route does not require one to be a specialized money manager in every available asset class one deems essential.
While I think the small investor can find a few good stocks for a portfolio, most are incapable of constructing a well-diversified portfolio. I am still waiting for the “Dr. Loof Lirpa” paper to be published.
Lowell
April 2nd, 2008 at 3:01 pm
“Excellent BLOG!”
Bob,
Thanks for the encouragement. I figure if readers don’t like the text they may enjoy the photographs. (g) I only wish I could pipe readers the beautiful music I listen to while I ink these posts.
Lowell
April 2nd, 2008 at 9:32 pm
Lowell: followed article but completely lost with the last 2 or 3 paragraphs, like:
["In 2006, the last year for which he has comprehensive data, this total came to $99.2 billion. Assuming that it grew in 2007 at the average rate of the last two decades, the amount for last year was more than $100 billion. Such a total is noteworthy for its sheer size and its growth over the years — in 1980, for example, the comparable total was just $7 billion, according to Professor French."]
First place lost was “this total came to $99.2 billion” Was that the total cost (but that seemed outrageous) or did they mean 100 billion minus 99.2 billion was the cost? And right on down the paragraphs.
thanks
April 3rd, 2008 at 5:41 am
Smokey,
That cost is $100 billion per year. Let’s see if we can come close with a powers of ten calculation. We ask three questions. 1) How many shares trade each day? 2) How many shares per trade? 3) What is the cost per trade?
To answer the first question, do we have 100 billion, 10 billion, or 1 billion shares traded per day? To the nearest power of ten, I go with 10 billion or 1 x 10^10 shares traded each day. To the second question, I ask, are we closer to 100 shares or 1000 shares per trade. It is likely closer to 100, but this may be a close call. As for the last question, I would go with $10 per trade rather than $100 per trade. I may be off here as well as not everyone uses a discount broker. Assume my assumptions are correct, here is the calculation.
10^10 shares/100 shares/trade = 10^8 trades per day. At $10 per trade we have $10 x 10^8 or a cost of $10^9. That is one billion per day. Trading days per year is 100 using powers of ten. So right there we have 100 x one billion or 100 billion per year. And we did not even need to go through all that research. (g)
Lowell
PS Let me know if I made an error. When working with powers of ten, the dividing line between 10 and 100, for example, is not 50 but rather something very close to pi (3.14). This is easily understood when using a slide rule.
April 3rd, 2008 at 5:48 am
Smokey et. al.,
Be sure to check the site for my PS on the last comment as it did not come through. I edited my comment with a discussion of where the dividing line is between powers of 10.
Lowell