Andy.. it is not enough to look at returns but the variance of those returns. It is not too hard to backtest a strategy with the benefit of hindsight and produce those returns.What is hard is real money implementation. Even if it is real trading, strategies could produce those return but have a high risk of ruin. I have friends here in CT (hedge fund havens) with > $250m AUM and they tell me a verifiable record > 10% with a LOW STANDARD DEVIATION will start to attract big investors. So if they have a 70% return. they would never sell it, they would run over to the Citadels of the world , get an allocation , run it and get their 2%/20% and not deal with the "public".
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Is this possible
- Thread starter andy_p
- Start date
If you take a step back and look at the market itself, you would know that after costs the returns will always be negative.
Most people look at the index and think that there is a natural positive bias and over decades you will make money. The reality is distorted because the indices avoid survivorship bias and don't pay themselves to exist. They constantly remove under performing companies and replace them with new growth or dividend paying companies to ensure that the index itself appears to provide a reasonable return to investors.
If you look at the real earnings of companies or the amount of free stock options and large bonuses given to management, you would realise there's nothing left for shareholders long term after paying their advisor.
That's not to say that you can't have a few people who simply get lucky and make money but that is not the average investor and there are a few of them relative to the large total population of investors. If people understood how difficult execution is and strip out all costs to understand the implication in terms of return, none of them would be trying their luck at investing and would simply go to a casino.
That's not to say it's impossible to make money in the casino or the stock market but the skill set required and the probabilities of profitability are much lower than what people have been told. You can quickly challenge your own beliefs by simply looking at companies like $TSLA or $VRX and their historical financial valuations relative to stock price. But these two stocks again are very small sample of a very large population of over 50,000 public companies in the US.
Most people look at the index and think that there is a natural positive bias and over decades you will make money. The reality is distorted because the indices avoid survivorship bias and don't pay themselves to exist. They constantly remove under performing companies and replace them with new growth or dividend paying companies to ensure that the index itself appears to provide a reasonable return to investors.
If you look at the real earnings of companies or the amount of free stock options and large bonuses given to management, you would realise there's nothing left for shareholders long term after paying their advisor.
That's not to say that you can't have a few people who simply get lucky and make money but that is not the average investor and there are a few of them relative to the large total population of investors. If people understood how difficult execution is and strip out all costs to understand the implication in terms of return, none of them would be trying their luck at investing and would simply go to a casino.
That's not to say it's impossible to make money in the casino or the stock market but the skill set required and the probabilities of profitability are much lower than what people have been told. You can quickly challenge your own beliefs by simply looking at companies like $TSLA or $VRX and their historical financial valuations relative to stock price. But these two stocks again are very small sample of a very large population of over 50,000 public companies in the US.
But if I invest in the index, do I care that some companies drop out as long as some others come in to replace them? My "index" return should take all of that into account?If you take a step back and look at the market itself, you would know that after costs the returns will always be negative.
Most people look at the index and think that there is a natural positive bias and over decades you will make money. The reality is distorted because the indices avoid survivorship bias and don't pay themselves to exist. They constantly remove under performing companies and replace them with new growth or dividend paying companies to ensure that the index itself appears to provide a reasonable return to investors.
In fact I would argue that precisely because of survivorship bias, it is easier for me to pick individual stocks within the index that perform better than the index: For the index to maintain its gain, those survived would have to perform better to cover the losses of those that failed?
The S&P 500 annual returns since January 1900 - January 2017 was approximately 2%.
Do you think 2% is reasonable return for stocks? Market goes up or down 2% every day if not week? How can we only make 2% return per year over 117 years? This excludes management fees and dividends.
You're right in that the fees today for managing an index like SPY, Are less than .1% so the underperformance is ever so slight and not significant. But what crappy returns.
There does not seem to be any Predictability in terms of which stocks will outperform in the index although you may feel that you're able to pick the winners. There are other reasons why stocks are removed from the index like a takeover at a 100% premium as well. But S&P 500 index/SPY being a mkt cap index, when the value drops below 3 B, it gets tossed. Thus the biggest priced stocks influence the index more as they get bigger.
But if every investor decides to just simply invest in an index fund, why would companies back off issuing free stock options to managers and crazy bonuses to their CEO?
Do you think United airlines has an exceptional CEO and deserves Millions in cash and stock
.? Where did those expected stock returns go - to the TOP 1%??
In summary, the survivorship Bias gives you the confidence to believe that the remaining stocks are the best ones since they're still around. In reality, the chance they outperform going forward is not reasonable as the lack of visibility of all the nonperformers wrongly gives the confidence to believe that you can pick the winners based on who is left.
The bigger danger is the lack of focus on individual stocks performance frees up management to get careless with shareholder funds and investors lose in the end.
What we need is more activist investor funds that will bully companies that are reckless but not charge the ridiculous management fees.
Do you think 2% is reasonable return for stocks? Market goes up or down 2% every day if not week? How can we only make 2% return per year over 117 years? This excludes management fees and dividends.
You're right in that the fees today for managing an index like SPY, Are less than .1% so the underperformance is ever so slight and not significant. But what crappy returns.
There does not seem to be any Predictability in terms of which stocks will outperform in the index although you may feel that you're able to pick the winners. There are other reasons why stocks are removed from the index like a takeover at a 100% premium as well. But S&P 500 index/SPY being a mkt cap index, when the value drops below 3 B, it gets tossed. Thus the biggest priced stocks influence the index more as they get bigger.
But if every investor decides to just simply invest in an index fund, why would companies back off issuing free stock options to managers and crazy bonuses to their CEO?
Do you think United airlines has an exceptional CEO and deserves Millions in cash and stock
.? Where did those expected stock returns go - to the TOP 1%??
In summary, the survivorship Bias gives you the confidence to believe that the remaining stocks are the best ones since they're still around. In reality, the chance they outperform going forward is not reasonable as the lack of visibility of all the nonperformers wrongly gives the confidence to believe that you can pick the winners based on who is left.
The bigger danger is the lack of focus on individual stocks performance frees up management to get careless with shareholder funds and investors lose in the end.
What we need is more activist investor funds that will bully companies that are reckless but not charge the ridiculous management fees.
Really? That sounds wrong - I just took a cursory look at Schiller's S&P data and I get a price return of approximately 5% (Jan 1900 S&P 500 was at 6.10 and I took 2275.12 as my Jan 2017 point). A better indicator of "goodness" for equity investors is the median S&P return since 1871 which was about 6.5% and the median dividend yield was approximately 4.5% (again, a quick cursory look).The S&P 500 annual returns since January 1900 - January 2017 was approximately 2%.
Really? That sounds wrong - I just took a cursory look at Schiller's S&P data and I get a price return of approximately 5% (Jan 1900 S&P 500 was at 6.10 and I took 2275.12 as my Jan 2017 point). A better indicator of "goodness" for equity investors is the median S&P return since 1871 which was about 6.5% and the median dividend yield was approximately 4.5% (again, a quick cursory look).
You are correct. The long run return for the S&P 500 including dividends is around 9.5% a year with an avg sharpe of about .50. I don't know where this joker is getting 2% from. Hell even bonds generate a long term return of around 4.5% a year.
Ok. If you want to go all the way back to 1871 then the returns are higher. The S&P was over 4%. As I said above, this excludes dividends cause the index ETF does not reinvest like the Vanguard fund does and you would have taxes plus additional fees to reinvest so the 9% return is not a real number. There was not a SPY contract back then so the management fees would have been significant of 2-5% per year and would have taken any dividends earned along the way. The commissions to trade would have been over 50 dollars back then to reinvest. No money left after fees.
The returns in recent history with management paying huge bonuses at the expense of shareholders is bringing down returns. So don't expect the historical average to continue.
Since 2000, the return is 3% and with dividends 5% ignoring tax and commissions. But still this is the average move in a week and we are suppose to be happy with that for a full year?
Doesn't this suggest that the markets are random for the most part and inflation provides a positive drift? So how can you generate 70% in a year and want to sell a program for pocket change to others? Doesn't pass the smell test!
The returns in recent history with management paying huge bonuses at the expense of shareholders is bringing down returns. So don't expect the historical average to continue.
Since 2000, the return is 3% and with dividends 5% ignoring tax and commissions. But still this is the average move in a week and we are suppose to be happy with that for a full year?
Doesn't this suggest that the markets are random for the most part and inflation provides a positive drift? So how can you generate 70% in a year and want to sell a program for pocket change to others? Doesn't pass the smell test!
Stymie,Ok. If you want to go all the way back to 1871 then the returns are higher. The S&P was over 4%. As I said above, this excludes dividends cause the index ETF does not reinvest like the Vanguard fund does and you would have taxes plus additional fees to reinvest so the 9% return is not a real number. There was not a SPY contract back then so the management fees would have been significant of 2-5% per year and would have taken any dividends earned along the way. The commissions to trade would have been over 50 dollars back then to reinvest. No money left after fees.
The returns in recent history with management paying huge bonuses at the expense of shareholders is bringing down returns. So don't expect the historical average to continue.
Since 2000, the return is 3% and with dividends 5% ignoring tax and commissions. But still this is the average move in a week and we are suppose to be happy with that for a full year?
Doesn't this suggest that the markets are random for the most part and inflation provides a positive drift? So how can you generate 70% in a year and want to sell a program for pocket change to others? Doesn't pass the smell test!
I have a lot of respect for you and I am not smart enough to argue with you. But your answers were simply too complex for me and I don't know how to use the information you provided. Being a small investor and not the financial type, I only look at when I put a dollar in, at the end how many dollars can I take out.
I have an IRA account investing in S&P500 index fund. Looking at the amount, using my simple 1 dollar in how many dollars out, I did way better than the 2%-4% you mentioned. Perhaps I just hit a lucky stretch, but that stretch included the great recession.
Question for all of you, as an investor and a trader, how shall I benchmark my return? Dollar in dollar out, CAGR, Sharpe, risk adjusted, alpha, beta...?
First of all, I did give you the annualized return from 1900 to 2017, which you stated totally wrong. Obviously, if you play around with the pre-Great Depression peak, you can find a life-time holding period that loses money or makes 2% as you state, but it's an exception, not a rule. If you really wanted to stir the pot, looking at Nikkei over the last 40 years is a better example.
Second of all, any sane human being should be able to do passive indexing of the top 50 names on his own at a reasonable cost. 2-3% scrape was normal for a union trust or (later) active mutual fund but that included a hefty profit for the provider. I recall reading a paper that the real cost of market indexing for a mid-size investor (today's 1 million in size) went from 45bp in 1907 to about 7bp today.
Third of all, every tax situation is different and that's the reason why tax treatment is not included into the return calculation (with some very specific exceptions). Nothing really prevents you from forming a holding company and paying yourself dividends same was as HF partners do.
Now, to the point - i totally agree that we need more activist investors. Nowadays, you can do proper, crowdsourced activism, just need infrastructure for it. In fact, I have suggested creating a section on this site for activism in smaller cap companies (but I guess it doesn't pay so I got no response).
Second of all, any sane human being should be able to do passive indexing of the top 50 names on his own at a reasonable cost. 2-3% scrape was normal for a union trust or (later) active mutual fund but that included a hefty profit for the provider. I recall reading a paper that the real cost of market indexing for a mid-size investor (today's 1 million in size) went from 45bp in 1907 to about 7bp today.
Third of all, every tax situation is different and that's the reason why tax treatment is not included into the return calculation (with some very specific exceptions). Nothing really prevents you from forming a holding company and paying yourself dividends same was as HF partners do.
Now, to the point - i totally agree that we need more activist investors. Nowadays, you can do proper, crowdsourced activism, just need infrastructure for it. In fact, I have suggested creating a section on this site for activism in smaller cap companies (but I guess it doesn't pay so I got no response).
Ok. If you want to go all the way back to 1871 then the returns are higher. The S&P was over 4%. As I said above, this excludes dividends cause the index ETF does not reinvest like the Vanguard fund does and you would have taxes plus additional fees to reinvest so the 9% return is not a real number. There was not a SPY contract back then so the management fees would have been significant of 2-5% per year and would have taken any dividends earned along the way. The commissions to trade would have been over 50 dollars back then to reinvest. No money left after fees.
The returns in recent history with management paying huge bonuses at the expense of shareholders is bringing down returns. So don't expect the historical average to continue.
Since 2000, the return is 3% and with dividends 5% ignoring tax and commissions. But still this is the average move in a week and we are suppose to be happy with that for a full year?
Doesn't this suggest that the markets are random for the most part and inflation provides a positive drift? So how can you generate 70% in a year and want to sell a program for pocket change to others? Doesn't pass the smell test!
Stymie,
I have a lot of respect for you and I am not smart enough to argue with you. But your answers were simply too complex for me and I don't know how to use the information you provided.
Question for all of you, as an investor and a trader, how shall I benchmark my return? Dollar in dollar out, CAGR, Sharpe, risk adjusted, alpha, beta...?
I guess the short answer is that the public markets are overpriced and management give themselves too many stock options to justify the risk. Many of my sovereign wealth clients have given up on public companies. They have shifted the focus to private companies and liquidate positions once they go IPO. I'm now looking at investing into private companies which will be shielded from the next big bear market in the public markets. I am able to restrict management from paying bonuses and dilution by selling more shares at a lower valuation. Big difference.