Good post Leslie.
Money Saver Magazine Sept
Money Saver magazine claims in the Sept issue to 'prove' that the 'buy-and-hold' strategy outperforms. It does not specify what exactly is outperforms, but the counterpart of buy-and-hold is active management that involves market-timing of both the asset mix and the individual holdings.
Like many MoneySaver articles it sets out to prove a predetermined point, and does not care how it does so. The points I give below are simple common sense. The editor's choice to publish the article strengthens my long-time position that beginner investors should NOT take their information from this publication.
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The overall error made was to confuse the 'buy-and-hold vs active' issue with two other issues; 1) indexes vs active mutual funds and 2) buy-and-hold stock portfolios vs indexes. Most of the article in fact focuses on the third issue. Factors from the second issue were used to distort the conclusions regarding the first issue purportedly being discussed.
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The author chose the performance results from US actively managed mutual funds to represent the 'active' side of the issue. This is not a valid representation with the following problems.
1) The fund results used were net of the (say) 2% management fees (that do not include transaction costs). While management fees are a factor in the "indexes vs active mutual funds" issue, they must be removed from an analysis of the investing process only.
2) Funds do not represent active portfolio management because of the constraints on their managers. Most do not allow short-selling, or hedging currency exposure with derivatives (or anything else), or even cashing out during market down-drafts. These disallowed behaviours are a huge part of 'active' management.
3) Fund managers must contend with cash in/outflows that are reported to happen at the worst possible times. E.g. investors pile out of funds AFTER poor returns, just when the manager's luck is about to turn.
You can make the argument that this investor behavior itself proves that active timing of the markets does not work. But that is not a totally valid presumption. The MF investor is working once-removed from the market. They respond to the manger's performance which they expect to protect them from losses. The issue supposedly being discussed in the article is not investors' success in picking managers, but the managers' success in investing.
4) The data presented on MF returns only compares 5-year returns for US funds vs the index return. The data should have removed the 2% management fees. It should have covered the same time period as the other analysis (14.5 years) and it should have documented Canadian funds.
GlobeInvest has a mutual fund page called "15-year results". It does not take long to look up the 15 yr returns of all the surviving funds. I agree this result has a lot of survivor bias in it ... but so does the author's analysis of stock portfolio returns.
5) When the 2% management fees are added back to the funds' 15-yr returns, it turns out that 35 of the 55 funds OUTPERFORM the index (64%). The conclusion they reached was wrong. Active management outperforms.
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The author represents the 'buy-and-hold' side of the issue with both the passive TSX index and also with a portfolio of individual stock bought 14.5 years ago and held non-stop.
1) He made a choice to present the returns in the form of 'cumulative % growth over the entire period', instead of annualized yearly returns. This is a common ploy when trying to impress the reader with how HUGE a difference results from even a small difference in yearly returns. Unfortunately the metric is meaningless except in comparison.
2) If his results are converted into annualized returns they show the index earning only 6.1% over the 14.5 years. That number should seem VERY low to people and would have set off alarm bells in the readers (but of course the number was not published). In fact the index's total return was about 8.5%, a number that can be verified in many places.
3) So his data is incorrect. If he erred in the index's data, which is easy to come by and calculate, it can only be presumed that his data for the individual stocks within his portfolio are also wrong.
He claims that his portfolio returned 14.2% yearly. Does that seem at all possible to you? Of course all the reader was presented with was the 586.6% cumultive return, which is meaningless. So no alarm bells went off.
4) Lastly there is the issue of the author's supposedly 'random' choice of stocks to put into his buy-and-hold portfolio. He starts with the CURRENT list of DJ40 Titans, not the Big40 in existence 14 years ago.
Big companies do not get that way without better than average growth. They are by definition the survivors who has a successful past performance. The author is using perfect hind-sight to choose the winners.
He augments the survivor bias by ignoring the 15 (of 40) stocks not yet in existence 14 years ago. That proportion (more than 1/3) confirms the author's error in presuming that today's Big40 are the same as the Big40 14 years ago.
Like many MoneySaver articles it sets out to prove a predetermined point, and does not care how it does so. The points I give below are simple common sense. The editor's choice to publish the article strengthens my long-time position that beginner investors should NOT take their information from this publication.
---------------------
The overall error made was to confuse the 'buy-and-hold vs active' issue with two other issues; 1) indexes vs active mutual funds and 2) buy-and-hold stock portfolios vs indexes. Most of the article in fact focuses on the third issue. Factors from the second issue were used to distort the conclusions regarding the first issue purportedly being discussed.
--------------------
The author chose the performance results from US actively managed mutual funds to represent the 'active' side of the issue. This is not a valid representation with the following problems.
1) The fund results used were net of the (say) 2% management fees (that do not include transaction costs). While management fees are a factor in the "indexes vs active mutual funds" issue, they must be removed from an analysis of the investing process only.
2) Funds do not represent active portfolio management because of the constraints on their managers. Most do not allow short-selling, or hedging currency exposure with derivatives (or anything else), or even cashing out during market down-drafts. These disallowed behaviours are a huge part of 'active' management.
3) Fund managers must contend with cash in/outflows that are reported to happen at the worst possible times. E.g. investors pile out of funds AFTER poor returns, just when the manager's luck is about to turn.
You can make the argument that this investor behavior itself proves that active timing of the markets does not work. But that is not a totally valid presumption. The MF investor is working once-removed from the market. They respond to the manger's performance which they expect to protect them from losses. The issue supposedly being discussed in the article is not investors' success in picking managers, but the managers' success in investing.
4) The data presented on MF returns only compares 5-year returns for US funds vs the index return. The data should have removed the 2% management fees. It should have covered the same time period as the other analysis (14.5 years) and it should have documented Canadian funds.
GlobeInvest has a mutual fund page called "15-year results". It does not take long to look up the 15 yr returns of all the surviving funds. I agree this result has a lot of survivor bias in it ... but so does the author's analysis of stock portfolio returns.
5) When the 2% management fees are added back to the funds' 15-yr returns, it turns out that 35 of the 55 funds OUTPERFORM the index (64%). The conclusion they reached was wrong. Active management outperforms.
-------------------------------
The author represents the 'buy-and-hold' side of the issue with both the passive TSX index and also with a portfolio of individual stock bought 14.5 years ago and held non-stop.
1) He made a choice to present the returns in the form of 'cumulative % growth over the entire period', instead of annualized yearly returns. This is a common ploy when trying to impress the reader with how HUGE a difference results from even a small difference in yearly returns. Unfortunately the metric is meaningless except in comparison.
2) If his results are converted into annualized returns they show the index earning only 6.1% over the 14.5 years. That number should seem VERY low to people and would have set off alarm bells in the readers (but of course the number was not published). In fact the index's total return was about 8.5%, a number that can be verified in many places.
3) So his data is incorrect. If he erred in the index's data, which is easy to come by and calculate, it can only be presumed that his data for the individual stocks within his portfolio are also wrong.
He claims that his portfolio returned 14.2% yearly. Does that seem at all possible to you? Of course all the reader was presented with was the 586.6% cumultive return, which is meaningless. So no alarm bells went off.
4) Lastly there is the issue of the author's supposedly 'random' choice of stocks to put into his buy-and-hold portfolio. He starts with the CURRENT list of DJ40 Titans, not the Big40 in existence 14 years ago.
Big companies do not get that way without better than average growth. They are by definition the survivors who has a successful past performance. The author is using perfect hind-sight to choose the winners.
He augments the survivor bias by ignoring the 15 (of 40) stocks not yet in existence 14 years ago. That proportion (more than 1/3) confirms the author's error in presuming that today's Big40 are the same as the Big40 14 years ago.
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Why didn't you actually name the title and author of the article?
I assume you're talking about the article "Buy-And-Hold Takes the Cake" by David Stanley. (IIRC, David is a retired professor who doesn't have a stake in selling financial products to anyone.)
I don't happen to agree with many of your points. For instance, I think that most people would agree that most funds (non-index) are active and represents active portfolio management.
But if you don't like David's article, why don't you submit your own to the magazine? The editor is a reasonable fellow.
Also, if you don't like the Canadian MoneySaver, do you actually like another Canadian financial publication? What do you suggest for new investors?
Let's see something constructive that might help out newbies.
I assume you're talking about the article "Buy-And-Hold Takes the Cake" by David Stanley. (IIRC, David is a retired professor who doesn't have a stake in selling financial products to anyone.)
I don't happen to agree with many of your points. For instance, I think that most people would agree that most funds (non-index) are active and represents active portfolio management.
But if you don't like David's article, why don't you submit your own to the magazine? The editor is a reasonable fellow.
Also, if you don't like the Canadian MoneySaver, do you actually like another Canadian financial publication? What do you suggest for new investors?
Let's see something constructive that might help out newbies.
I have been answering newbies' questions for years now on other sites. I reiterate the constructive advice I gave above... "Do not read this magazine unless you already know the ins/outs of investing".
The problem with not knowing stuff, and trying to learn, is that you really have no way to know whether the material you are reading is correct or not. It is the editor's job in any publication to ensure quality and prevent this loss of credibility. You should not presume I have never contacted him about errors before.
The OP also served 1) to exemplify my overriding advice to all investors TO THINK FOR YOURSELF. That yes, common sense can trump letters after your name, that accepting people's POV because of WHO they are instead of WHAT their arguments are will lead you astray. 2) It also serves to exemplify my repeated advice that all retail investors must buy a financial calculator. I will bet that not one reader of that article got up from his chair to boot up a computer and load a FV$ calculator. But it only took a second for me to see the annualized returns and know the data was bogus. 3) And of course the OP also served to 'prove with qualifications' that active management outperforms buy-and-hold. The opposite of the article's conclusion.
The problem with not knowing stuff, and trying to learn, is that you really have no way to know whether the material you are reading is correct or not. It is the editor's job in any publication to ensure quality and prevent this loss of credibility. You should not presume I have never contacted him about errors before.
The OP also served 1) to exemplify my overriding advice to all investors TO THINK FOR YOURSELF. That yes, common sense can trump letters after your name, that accepting people's POV because of WHO they are instead of WHAT their arguments are will lead you astray. 2) It also serves to exemplify my repeated advice that all retail investors must buy a financial calculator. I will bet that not one reader of that article got up from his chair to boot up a computer and load a FV$ calculator. But it only took a second for me to see the annualized returns and know the data was bogus. 3) And of course the OP also served to 'prove with qualifications' that active management outperforms buy-and-hold. The opposite of the article's conclusion.
So, I ask again, what Canadian magazines / publications would you recommend?I have been answering newbies' questions for years now on other sites. I reiterate the constructive advice I gave above... "Do not read this magazine unless you already know the ins/outs of investing".
If you want to change the subject, start a new thread. Seems to me newbies regularly ask that question and get answered.
LOL. So, that would be none then.If you want to change the subject, start a new thread. Seems to me newbies regularly ask that question and get answered.
As far as helping and answering newbie questions I would have to say I don't know anybody who answers them more then leslie has. And yes leslie has been answering them for years on another site.
That's very nice of leslie but I'm not sure it matters in the context of this discussion. The question wasn't how generous are you with your time. It was: if you're going to crap on MoneySaver and its editor, what do you suggest as an alternative?As far as helping and answering newbie questions I would have to say I don't know anybody who answers them more then leslie has. And yes leslie has been answering them for years on another site.
Yes, I see this thread covering the topic but I didn't see leslie's thoughts. Inquiring minds want to know.
So did you offer to write a piece to point MoneySaver's readers in the right direction? Or did you just call him up and give him crap for printing what you feel to be crappy articles?leslie said:You should not presume I have never contacted him about errors before.
Leslie said, "Money Saver magazine claims in the Sept issue to 'prove' that the 'buy-and-hold' strategy outperforms. It does not specify what exactly is outperforms, but the counterpart of buy-and-hold is active management that involves market-timing of both the asset mix and the individual holdings.
Like many MoneySaver articles it sets out to prove a predetermined point, and does not care how it does so. The points I give below are simple common sense. The editor's choice to publish the article strengthens my long-time position that beginner investors should NOT take their information from this publication."
So to me one of the points is to say that beginner investors should stay away from taking information from this magazine. The post has nothing to do with which magazine leslie thinks you could or should read, although it is fair to ask the question and it is up to leslie if leslie wants to answer the question. So you are as far off the thread as you say I am and my point was not one for discussion but just some info. to back up what leslie said in reply.
Like many MoneySaver articles it sets out to prove a predetermined point, and does not care how it does so. The points I give below are simple common sense. The editor's choice to publish the article strengthens my long-time position that beginner investors should NOT take their information from this publication."
So to me one of the points is to say that beginner investors should stay away from taking information from this magazine. The post has nothing to do with which magazine leslie thinks you could or should read, although it is fair to ask the question and it is up to leslie if leslie wants to answer the question. So you are as far off the thread as you say I am and my point was not one for discussion but just some info. to back up what leslie said in reply.
Leslie is showing wisdom by not responding to this question as to do so just enables the hijacking of the thread - and the spiral into endless off topic argumentThe post has nothing to do with which magazine leslie thinks you could or should read, although it is fair to ask the question and it is up to leslie if leslie wants to answer the question.
I haven't read the Sept. issue of Money Saver, so I can't comment on the data in the article. However, it would be of no surprise to me that buy-and-hold portfolios on average outperform actively-managed portfolios.Money Saver magazine claims in the Sept issue to 'prove' that the 'buy-and-hold' strategy outperforms. It does not specify what exactly is outperforms, but the counterpart of buy-and-hold is active management that involves market-timing of both the asset mix and the individual holdings.
There is simply no evidence that active management in any shape or form -- whether stock picking or market timing, on average, outperforms buy-and-hold. If there is, I'd like to see it. But there is plenty of research showing active management underperforms.
Leslie,
Thank you for the reminder to use our minds before assuming things are correct. you are right in that no one else pulled out a calculator to check the data...
Thank you for the reminder to use our minds before assuming things are correct. you are right in that no one else pulled out a calculator to check the data...
I didn't read the article, but I disagree with the assertion that choosing "US actively managed mutual funds" (points 1 to 5) was a invalid comparator. For the novice, average at-home investor who is being marketed by the banks and investment firms, this is the product being pushed. No leslie, you are not a normal, novice, at home investor (that's a compliment BTW) as such you are not targeted by these products. Likewise, the intended audience for this article is that same person, not an accountant who likes to scour balance sheets.The author chose the performance results from US actively managed mutual funds to represent the 'active' side of the issue. This is not a valid representation with the following problems.
[snip]
If this article intended to debate between a full-on, independent stock picker versus passive / buy and hold, then obviously choosing a large MF is not representative. This would be like using a private hedge fund to represent a technical stock picker/chart reader.
So all the negative detractors from these MF are applicable when considering they are a valid choice by a normal, novice investor. Likewise, fees and expenses product for product who always be considered. Sure that Chevrolet is cheaper than a Toyota, but when you have repairs sooner and more often on the Chev than the Toyota, is it still cheaper?
There is simply no evidence that active management in any shape or form -- whether stock picking or market timing, on average, outperforms buy-and-hold. If there is, I'd like to see it. But there is plenty of research showing active management underperforms.
You may want to read the article about the Random Walk Theory at Stockcharts.com. It gives balanced background info about how Buy and Hold came to be and also mentions a couple of studies that conclude that Buy and Hold does not always outperform.
NYU study - Market timing beats buy and hold
The title of the article could be seen as misleading I agree, but I don't get the criticism that it's not useful for newbies. A newbie investor would be looking at managed funds vs index funds, and they would be looking for net returns, so I'd say that comparison would be quite appropriate for them when considering whether to buy managed or indexed funds.
The article above also uses the comparison of active mutual funds to an index as "Proof" . As I listed above, there are many reasons this is not a valid way to devise the proof.
It is not logical to argue a comparison of PRODUCTS as proof for a comparison of STRATEGIES. It would be a change of subject.
Your own personal situation, and the products available to you, and your ability to use different strategies, are NOT variables for deciding which strategies work best.
It is not logical to argue a comparison of PRODUCTS as proof for a comparison of STRATEGIES. It would be a change of subject.
Your own personal situation, and the products available to you, and your ability to use different strategies, are NOT variables for deciding which strategies work best.
1 - 18 of 18 Posts
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