Can you trade smarter than a 10 year old?

[sjfan]

I'm not sure I agree with that (also, to nit pick, this isn't much of a study) - these kids picked a lot of consumer cyclicals, which they obviously would given they are kids and these are the companies most visible to them. It follows that their high beta portfolio will do better than the market in an expansionary phase of the business cycle. What happens to this portfolio in recession? does it under perform?

It's a cute story. And there's something interesting in it - managers make the same style bias mistakes and call it skill. But 1 sample of kids picked a bunch of consumer cyclicals in a bull market that out performs the market hardly leads to any solid conclusion.

Quote from monty21:

Hi Sjfan,

I remember the 7th grade example from the first book I ever read on the market: Peter Lynch's "Beating the Street".

I googled it and came across this link:

http://pennysleuth.com/can-you-outperform-a-group-of-7th-graders/

It's a passage from the book.

And yes, although portfolio managers adhere to some sort of mandate, the kids outperformed 99% of all stock mutual funds... pretty impressive nevertheless.

St. Agnes Portfolio
1990-91 Performance (%)
Wal-Mart 164.7
Nike 178.5
Walt Disney 3.4
Limited 68.8
L.A. Gear -64.3
Pentech 53.1
Gap 320.3
PepsiCo 63.8
Food Lion 146.9
Topps 55.7
Savannah Foods -38.5
IBM 3.6
NYNEX -0.22
Mobil 19.1

Total Return for Portfolio: 69.6
S&P 500: 28.08

 

[monty21]

Quote from sjfan:

I'm not sure I agree with that (also, to nit pick, this isn't much of a study) - these kids picked a lot of consumer cyclicals, which they obviously would given they are kids and these are the companies most visible to them. It follows that their high beta portfolio will do better than the market in an expansionary phase of the business cycle. What happens to this portfolio in recession? does it under perform?

It's a cute story. And there's something interesting in it - managers make the same style bias mistakes and call it skill. But 1 sample of kids picked a bunch of consumer cyclicals in a bull market that out performs the market hardly leads to any solid conclusion.

You're right... its true that these kids selected the hot growth stocks that year... I mean WMT, NKE, GPS, and Food Lion at 135% - 325% gains is absurd. Could've been by chance and not very scientific.

But if you want empirical evidence, just google "fund managers underperforming the indexes". I don't want to get into EMH, but there are many studies whereby the vast majority managers underperform (and this includes, i.e. a portfolio growth mandate underperforming the S&P 500 in a very bullish year).

I'm not saying kids make better traders . Day trading requires exceptional skill and swing trading is close.

In terms of "investing" though, I do believe that kids or other generally clueless market participants can outperform the market and fund managers in a buy-and-hold strategy. They have less bias, no mandates and are more likely to be in touch with the actual companies they are investing in rather than trusting a Goldman Sach analyst's b.s.

 

[sjfan]

Not dispute that one bit. There are a whole lot of managers who under perform. Personally, I think that's expected given that markets are generally efficient up to a point. There would be something seriously wrong if most managers outperform the market.

My point was merely on the folksy stories people like to use as proof of manager incompetence. There are enough real life examples. These anecdotes are, on the other hand, mostly fallacies of reasoning.

Quote from monty21:

You're right... its true that these kids selected the hot growth stocks that year... I mean WMT, NKE, GPS, and Food Lion at 135% - 325% gains is absurd. Could've been by chance and not very scientific.

But if you want empirical evidence, just google "fund managers underperforming the indexes". I don't want to get into EMH, but there are many studies whereby the vast majority managers underperform (and this includes, i.e. a portfolio growth mandate underperforming the S&P 500 in a very bullish year).

 

[sjfan]

For example, futures managers tend to have lower return than the stock market, but low correlation and lower risk - does that mean they are losers compared to the buy-and-hold random stock pickers?

... if you have a pool of people who randomly form portfolios with fewer holdings then in the index, then over any bull market some large percentage of them will outperform the market. Over a full cycle, it might be closer to fifty-fifty. I'd be interested to see how this population compares a universe of hedge fund managers. Maybe hedge fund managers are worse, maybe the same, probably not better. In any case, it certainly isn't intuitively clear to me.

Buy and hold isn't exactly a gold standard strategy (just a simple one). For one thing, it assumes you have the same tolerance for risk no matter what your wealth level is, which clearly ain't true. Second, it's susceptible to huge draw-downs (compared to, say, constant proportion allocation).

Anyway, my basic point is that the problem is vastly more complicated - especially when risk measures are thrown in.

Quote from monty21:


In terms of "investing" though, I do believe that kids or other generally clueless market participants can outperform the market and fund managers in a buy-and-hold strategy. They have less bias, no mandates and are more likely to be in touch with the actual companies they are investing in rather than trusting a Goldman Sach analyst's b.s.

 

[monty21]

Quote from sjfan:

Anyway, my basic point is that the problem is vastly more complicated - especially when risk measures are thrown in. [/B]

Agreed...

But it's still interesting that the vast majority of mutual fund managers (regardless of risk tolerance and mandate) underperform the S&P 500. And the S&P 500 is a pretty conservative index.

 

[sjfan]

Eh, mutual fund managers usually aren't exactly the brightest bunch... managing retail money (as mutual fund is known) isn't exactly a prestigious appointment; that being said, why would exact a mutual fund manager with a stable value fund outperform the spx? you wouldn't.

Talk to a fund-of-funds analyst and he'll give you an ear full of how difficult it is to evaluate performance objectively.

Quote from monty21:

Agreed...

But it's still interesting that the vast majority of mutual fund managers (regardless of risk tolerance and mandate) underperform the S&P 500. And the S&P 500 is a pretty conservative index.

 

[The General]

The thumbsuckers have already arrived-and I see that they have brought some new playmates.

As per the title-lets us ask the children a very basic question and see if they can read?

Why do you trade?

Others may of course answer-but in order to see if you can trade smarter than a 10 year old-you must first see how the 10 yeard olds actually trade.

The General

 

[The General]

Quote from dtrader98:

reminds me of the most comical title I've seen in a long time.

Throw out all those TA, and advanced quant books. A second grader will beat you all (yeah, right; maybe if he is of the madoff lineage).

dtrader98-

It will become clear to all that this is pure rubbish-but before we get to that we have some very basic facts to cover first.

We will let the children answer-then we will question them again-and so on and so forth-until there is no doubt as to how they trade.

Then we will see how many can trade smarter than a 10 year old?

The General

 

[sjfan]

Do you stand in a mirror every morning to see how much you can sound like jack hersey?

Quote from The General:

The thumbsuckers have already arrived-and I see that they have brought some new playmates.

As per the title-lets us ask the children a very basic question and see if they can read?

Why do you trade?

Others may of course answer-but in order to see if you can trade smarter than a 10 year old-you must first see how the 10 yeard olds actually trade.

The General

 

[Trader666]

I think you should learn what a chart is first. And stop plagiarizing from real traders.

Quote from The General:

The thumbsuckers have already arrived-and I see that they have brought some new playmates.

As per the title-lets us ask the children a very basic question and see if they can read?

Why do you trade?

Others may of course answer-but in order to see if you can trade smarter than a 10 year old-you must first see how the 10 yeard olds actually trade.

The General