[bean438]

Not sure why I am even posting this BUT, both the passive camps, and active camps can shell out statistics to support their claims on why passiv or active funds are better than the others.

I was thinking that since index funds have a MER, even though it is very small, can it not be said that an index fund will underperform the market 100% of the time?

This means that an index fund will outperform the market 0% of the time?

Surely any active manager can "beat" these odds?

Score one for the active camp?

p.s. what's better a Mac or a PC?

 

[HaroldCrump]

I was thinking that since index funds have a MER, even though it is very small, can it not be said that an index fund will underperform the market 100% of the time?

Yes, it will.
Best case scenario is it will underperform only by the % of the MER.
However, there are tracking errors and other inefficiencies that sometimes cause a slightly more underperformance.
Also depends on whether the ETF is using the "classical" ETF model of weights by market cap or "fundamental" weights.

This means that an index fund will outperform the market 0% of the time?

Correct

Surely any active manager can "beat" these odds?

Yes, for sure.
The issue is not whether an active manager can beat the index or not - the issue is the same manager beating the index year after year.
That's where passive indexing scores over active investing.

Score one for the active camp?

Not quite, but nice try

 

[CanadianCapitalist]

Not sure why I am even posting this BUT, both the passive camps, and active camps can shell out statistics to support their claims on why passiv or active funds are better than the others.

I was thinking that since index funds have a MER, even though it is very small, can it not be said that an index fund will underperform the market 100% of the time?

This means that an index fund will outperform the market 0% of the time?

Surely any active manager can "beat" these odds?

Score one for the active camp?

p.s. what's better a Mac or a PC?

You are absolutely right that an index fund will always trail its benchmark. An active fund offers you a chance to outperform the index. The question is what are the odds? The answer is not very good.

The key question though is this: do you really care whether a fund you hold beats an index? Or do you care more that your investments give you the best chance of meeting your financial obligations?

 

[Jon_Snow]

The only thing that matters to me is that my couch potato portfolio of low cost TD e-series index funds has performed admirably since I purchased them in June of this year... I'm sticking with it.

 

[bean438]

CC I would care if my fund did not beat the index, and I was paying a high MER.
You get what you pay for "should" apply, but sadly it often doesn't.

I think if you focus on the actual guy running the fund rather than the fund itself you can better your odds.

Buffet isn't the only one out there.

Tweedy Browne comes to mind, as does Charles(?) Brandes. He ran one of the popular canadian mutual funds at one point that was doing extremely well. Cant remember which one. Then he left and the fund didnt do as well. Charles's own funds did well.

If you own Berkshire you effectively own a mutual fund run by an excellent investor.

I am exploring a Smith manoeuvre and I am contemplating many types of investments, and was amazed at how you can make anything look good or bad by focusing on different statistics, research papers, and market time periods, etc. I thought I would play a little with statistics, and index funds having a zero % track record.

I am noticing a few "rules" of thumb though:

1. Passive indexing will outperform "most" active funds more of the time, and they are most suitable for the average joe who will not do research, or will be "spooked", and/or jump ship and chase the latest trends.

2. If you decide to DIY, or utilize an active manager, a value based approach, or a fund with a value based approach will more than likely outperform everything else most of the time over the long run.

Personally I believe you cant lose by going passive because at the end of the day markets have always gone up long term. (cant remember what book it was from but it showed a chart that went up and the caption was " through a great depression, 2 world wars, famine, disease, 1929 market crash, etc, markets always go up.)
Buffet himself advocates indexing so, really who can argue that?

I also believe that markets are not efficient, at least not in a sense that EMT would have you believe.

Mechanically yes markets are very efficient. The computer age, twitter, etc means there is no stone unturned. Information flows so quickly you cant say markets are not efficient.

Markets are not however rational. When Graham said markets were not efficient there were no computers. It took ice ages by todays standards for information to flow.

Replace efficient with rational and there you have it.

At the end of the day with all the technology we have, we are still human beings, fuelled by FEAR and GREED.

Graham was right about mr market the schizo.
Be fearful when others are greedy and greedy when others are fearful.

Very easy to say, VERY difficult to do.

Bottom line if you can say it, but not do it, go passive.
If you can say it AND do it, go active.

 

[brad]

CC I would care if my fund did not beat the index, and I was paying a high MER.
You get what you pay for "should" apply, but sadly it often doesn't.

I think if you focus on the actual guy running the fund rather than the fund itself you can better your odds.

Over the holidays, you should read "Fooled by Randomness" by Nassim Nicholas Taleb. While it can be an exasperating book to read because he's so conceited, he's also right and it's worth enduring his attitude to get an understanding of randomness in the markets.

Basically "the guy running the fund" may have a great short-term track record but eventually he (or she, if the guy happens to be a woman) will blow up. That has nothing to do with skill or knowledge, it's due to randomness. Yes, skill and knowledge play a role in active fund management and stock picking, but you still have to keep the role of randomness in perspective.

A portion of any manager's good performance is due to skill and a portion is due to luck. If you flip a coin, it has a 50 percent chance of coming up heads and a 50 percent chance of coming up tails. But that doesn't mean that flipping a coin 100 times will turn up 50 heads and 50 tails. You could have 100 heads, 100 tails, or any combination of the two that adds up to 100.

This is one of the reasons why, over short-term periods and even in some cases over several decades, active management may come out ahead, but over the longer term passive management tends to win out.

 

[Spidey]

There are valid reasons not to index or to have a portion of your portfolio actively invested. For example, I took a small leveraged position last year and I invested in products that I could be fairly confident (no guarantees of course) to continue paying a dividend greater than the interest amount of my HELOC. I then, don't have to pay a whole lot of attention to what the market is doing as long as I'm collecting the dividends.

Personally, I'm about half active and half passive.

 

[Berubeland]

Mac

 

[bean438]

Brad I have read the Black Swan by the same author. The book you mention is on my list.

May I suggest you read the super investors of graham and dodsville? It wipes out the coin flipping arguement.
It is written by Warren Buffet.
He is a billionarie whereas your author is not.
My money is on WEB.

I agree the markets are random and efficient. But the are not rational at all times. Some people can profit from this, most cannot.

 

[OptsyEagle]

This means that an index fund will outperform the market 0% of the time

Yes, but how does knowing that help you pick a fund that does outperform the market.

You see, that is the problem. You can't. It's not only that active managers cannot outperform the averages consistently, but we ourselves, will usually either not find the ones that are currently outperforming the averages (as brad said, randomly 50% will always be doing it for a short period of time) or worse ... invest in them after they have had their lucky outperformance and just before they have their unlucky underperformance. This is very common and mathematically a certainty.

This moving from one underperforming fund to the next fund that is about to underperform, will go on for most mutual fund investors for many, many years, before they figure out that it is not their fault or the money managers fault. Outperforming the benchmarks, is almost statistically impossible. Only the lucky will ever achieve this and from what I know about luck ... is it always eventually runs out.

Good luck to you.

 

[mogul777]

Not sure why I am even posting this BUT, both the passive camps, and active camps can shell out statistics to support their claims on why passiv or active funds are better than the others.

I was thinking that since index funds have a MER, even though it is very small, can it not be said that an index fund will underperform the market 100% of the time?

This means that an index fund will outperform the market 0% of the time?

Surely any active manager can "beat" these odds?

Score one for the active camp?

p.s. what's better a Mac or a PC?

Technically it is possible for a passive fund to outperform the index for random periods of time, though highly unlikely because of the fee hurdle. In other words over the longer term an index will underperform, but may outperform periodically so no that is not correct. Is an MER in excess of 1% or even .25% "very small" for a passive fund? Many index funds charge obscene fees just as active funds do.

Brandes? Deep value is only attractive during certain parts of the market cycle, why would anyone hold these funds across a market cycle? One answer of course would be market timing... where the odds may be even worse than for the managed funds consistent outperformance.

A PC, MACs are obscenely priced.

 

[bean438]

Deep value will work. The problem is that people buy into value, and instead of holding they jump ship when value is dead (I am thinking of Time magazine's front page.."what's wrong Warren?"). Sell the value fund and get into the next big thing, usually too late as "everybody's talkin bout it"..

Next big thing tanks, and value takes off, right about the time the investor decides value is a good thing again.

The dick davies dividend book says everything works, but nothing works all the time.
What I took from it is that pick an investment "style" and stick with it.

Style timing is like market timing.

I guess you could also say stick with what you know. Buffet doesnt touch tech, or software.

Seriously I dont think you can go wrong with a DCA index fund. Set it and forget it. You are forced saving, invested in equities, and not prone to news, etc.

Personally I have done well with dividend growth stocks, focusing not on the share price (other than when I buy) but on the income.

In just over 10 years my dividend income has always been higher than the last, even after the last year and a bit of dividend cuts. (PFE, GE)

 

[ssimps]

Deep value will work. The problem is that people buy into value, and instead of holding they jump ship when value is dead (I am thinking of Time magazine's front page.."what's wrong Warren?"). Sell the value fund and get into the next big thing, usually too late as "everybody's talkin bout it"..

Next big thing tanks, and value takes off, right about the time the investor decides value is a good thing again.

The dick davies dividend book says everything works, but nothing works all the time.
What I took from it is that pick an investment "style" and stick with it.

Style timing is like market timing.

I guess you could also say stick with what you know. Buffet doesnt touch tech, or software.

Seriously I dont think you can go wrong with a DCA index fund. Set it and forget it. You are forced saving, invested in equities, and not prone to news, etc.

Personally I have done well with dividend growth stocks, focusing not on the share price (other than when I buy) but on the income.

In just over 10 years my dividend income has always been higher than the last, even after the last year and a bit of dividend cuts. (PFE, GE)

I really agree with this. My biggest investment mistakes have been deciding to change my investment 'style' / risk level because I got caught up in the current hype. Only to find that I changed at peak and lost in the end. To add insult to injury, I did this type of thing when I had official 'investment advisers' who seemed to always be happy to take my $ regardless of the bigger picture / situation and at least the day I would do it this made me think I was doing the 'right' thing even more. Lost lots of money because of these emotionally driven flip flops. Hopefully that is the past.

Now I buy and stay with it in most cases and I do not have an adviser that is being paid not just by my commissions but also buy a big bank they work for; can you say 'conflict of interest'?

I do like stuff that has a good div. yield (4-5%+ these days) because it helps me sleep at night. Maybe I'll not beat the markets or be a top performer, but mentally it allows me to take the stock price ups and downs more in stride, and buy when there is a bit of a dip and not be too tempted to sell when there is a high.

I guess what I mean is that I find good yielding stocks help me stay in it for the longer term because I'm not just looking for capitol gains all the time.

Hopefully this will work out in the longer term.