What are the arguments against index investing?

ironchef said:
How about:

BRK.A?

Hedge Fund Market Wizards? http://www.wiley.com/WileyCDA/WileyTitle/productCd-1118283619.html
More...

There always will be couple of exceptions. Medallion fund by Renaissance is another one of those exception, but this is closed and data is hard to get.

Buffet's return is unique in the sense he basically benefited from cheap leverage provided by insurance operations. There are studies done by Andrea Fazzini, which concluded that after taking into account the factors like market beta, size, value, momentum, betting against beta, quality and leverage his alpha is statstically insignificant. Basically what we know his alpha was in fact were beta's. But it does not take away his achievement, he did it before all these factors were discovered.
 
http://www.nber.org/papers/w19681.pdf

Page 6 of this paper. Again this is not knock against him and as i mentioned before, he did it before these factor's were discovered.

Given Buffett’s tendency to buy stocks with low return risk and low fundamental risk, we further adjust his performance for the BettingAgainst-Beta (BAB) factor of Frazzini and Pedersen (2013) and the Quality Minus Junk (QMJ) factor of Asness, Frazzini, and Pedersen (2013). We find that accounting for these factors explains a large part of Buffett's performance. In other words, accounting for the general tendency of high-quality, safe, and cheap stocks to outperform can explain much of Buffett’s performance and controlling for these factors makes Buffett’s alpha statistically insignificant

Also this quote from Buffet is relevant to this thread
Ben Graham taught me 45 years ago that in investing it is not necessary to do extraordinary things to get extraordinary results – Warren Buffett, Berkshire Hathaway Inc., Annual Report, 1994
 
Last edited:
srinir said:
http://www.nber.org/papers/w19681.pdf

Page 6 of this paper. Again this is not knock against him and as i mentioned before, he did it before these factor's were discovered.

Given Buffett’s tendency to buy stocks with low return risk and low fundamental risk, we further adjust his performance for the BettingAgainst-Beta (BAB) factor of Frazzini and Pedersen (2013) and the Quality Minus Junk (QMJ) factor of Asness, Frazzini, and Pedersen (2013). We find that accounting for these factors explains a large part of Buffett's performance. In other words, accounting for the general tendency of high-quality, safe, and cheap stocks to outperform can explain much of Buffett’s performance and controlling for these factors makes Buffett’s alpha statistically insignificant

Also this quote from Buffet is relevant to this thread
Ben Graham taught me 45 years ago that in investing it is not necessary to do extraordinary things to get extraordinary results – Warren Buffett, Berkshire Hathaway Inc., Annual Report, 1994
More...
Is it then possible to out perform by duplicating his strategy and if not, why not (other than the free leverage part)?

Of course when everyone does it, it won't work but since only a few are doing it shouldn't it work?

Regards,
 
His alpha is not statistically insignificant means that it can be duplicated theoretically.

He has advantage that few others does not have (deservedly so) as the article mentions. He can lever up using rates below US T-bill rate, That itself is significant alpha when levered up. Second his name carries cache. They provided some example like he can sell puts without posting any margin and make sweet heart deals during times of stress like no one can.

That is why i mentioned earlier it is better to lever up in the long run (for young investors). Just regress his returns and lever up.
https://www.portfoliovisualizer.com/factor-analysis?s=y&regressionType=1&symbols=BRK.A&endDate=10/17/2017&factorDataSet=0&marketArea=0&factorModel=5&useHMLDevFactor=false&includeQualityFactor=false&includeLowBetaFactor=false&fixedIncomeFactorModel=0&__checkbox_ffmkt=true&__checkbox_ffsmb=true&__checkbox_ffsmb5=true&__checkbox_ffhml=true&__checkbox_ffmom=true&__checkbox_ffrmw=true&__checkbox_ffcma=true&__checkbox_ffstrev=true&__checkbox_ffltrev=true&__checkbox_aqrmkt=true&__checkbox_aqrsmb=true&__checkbox_aqrhml=true&__checkbox_aqrhmldev=true&__checkbox_aqrmom=true&__checkbox_aqrqmj=true&__checkbox_aqrbab=true&__checkbox_trm=true&__checkbox_cdt=true&timePeriod=2&rollPeriod=36&marketAssetType=1&robustRegression=false

This link is showing about 5% alpha, but this analysis does not consider leverage. One never can achieve his returns because of inherent advantage he has. Frankly instead of replicating his returns which seems costly, it is just better to purchase his stock. But one risk is his age, all his cache will be gone after he dies.
 
I think at least some of Warren Buffett's alpha can be attributed to him being what's normally described in poker as a "big pot bully". Furthermore, there are all sorts of positive network effects that come with size and scale, which, I guess, in Buffett's case offset the possible negative liquidity effects.
 
^agree.

I just looked at Midcap value (which is mostly his holdings) and T-bill rates from 1986. Mid-cap value premium over Tbill during this period is 9%. Article mentions he is using 60% leverage. So basically his alpha of 5.5% can be explained by the leverage (9%*0.6= 5.4)
 
Provide data for what exactly? I haven't made any positive claims that would shift the burden of proof to me. I said that investors with resources should conduct their own research if they can get alpha or not from active management/managers instead of relying on simplistic studies that hardly go deeper than active/passive management label. I have no reasons to say that, for example, Norges Bank Investment Management are foolish and wrong for having in-house equity team and allocating some money to other active managers because I don't know what their research has shown. Given that their papers certainly show awareness of all kinds of factors/premia and that they were saying that an average active manager is too expensive as far as 15 years ago, I would not attribute their decisions to pure ignorance.

I don't have anything to add to this conversation, so I am done.


p.s. if you need more ammo to target anyone defending active managers and want to feed confirmation bias, you can also read those interesting (imo) articles:
https://www.bloomberg.com/news/arti...d-the-math-explaining-active-manager-futility
https://www.ft.com/content/152b3b60-baf9-11e6-8b45-b8b81dd5d080?mhq5j=e6
 
srinir said:
His alpha is not statistically insignificant means that it can be duplicated theoretically.

He has advantage that few others does not have (deservedly so) as the article mentions. He can lever up using rates below US T-bill rate, That itself is significant alpha when levered up. Second his name carries cache. They provided some example like he can sell puts without posting any margin and make sweet heart deals during times of stress like no one can.

That is why i mentioned earlier it is better to lever up in the long run (for young investors). Just regress his returns and lever up.
https://www.portfoliovisualizer.com/factor-analysis?s=y&regressionType=1&symbols=BRK.A&endDate=10/17/2017&factorDataSet=0&marketArea=0&factorModel=5&useHMLDevFactor=false&includeQualityFactor=false&includeLowBetaFactor=false&fixedIncomeFactorModel=0&__checkbox_ffmkt=true&__checkbox_ffsmb=true&__checkbox_ffsmb5=true&__checkbox_ffhml=true&__checkbox_ffmom=true&__checkbox_ffrmw=true&__checkbox_ffcma=true&__checkbox_ffstrev=true&__checkbox_ffltrev=true&__checkbox_aqrmkt=true&__checkbox_aqrsmb=true&__checkbox_aqrhml=true&__checkbox_aqrhmldev=true&__checkbox_aqrmom=true&__checkbox_aqrqmj=true&__checkbox_aqrbab=true&__checkbox_trm=true&__checkbox_cdt=true&timePeriod=2&rollPeriod=36&marketAssetType=1&robustRegression=false

This link is showing about 5% alpha, but this analysis does not consider leverage. One never can achieve his returns because of inherent advantage he has. Frankly instead of replicating his returns which seems costly, it is just better to purchase his stock. But one risk is his age, all his cache will be gone after he dies.
More...
Most of us joined ET because we wanted to be ET. To tell ET that there is no hope of beating indexing is to crush someone's dream.

I appreciate it when you told us how to improve our odds of beating indexing through trading. Using Buffett's leveraging as a way to create positive alpha is a positive step in this direction. Thank you and welcome.

Best wishes.
 
srinir said:
http://www.nber.org/papers/w19681.pdf

Page 6 of this paper. Again this is not knock against him and as i mentioned before, he did it before these factor's were discovered.

Given Buffett’s tendency to buy stocks with low return risk and low fundamental risk, we further adjust his performance for the BettingAgainst-Beta (BAB) factor of Frazzini and Pedersen (2013) and the Quality Minus Junk (QMJ) factor of Asness, Frazzini, and Pedersen (2013). We find that accounting for these factors explains a large part of Buffett's performance. In other words, accounting for the general tendency of high-quality, safe, and cheap stocks to outperform can explain much of Buffett’s performance and controlling for these factors makes Buffett’s alpha statistically insignificant

Also this quote from Buffet is relevant to this thread
Ben Graham taught me 45 years ago that in investing it is not necessary to do extraordinary things to get extraordinary results – Warren Buffett, Berkshire Hathaway Inc., Annual Report, 1994
More...

Accounting for buffets choice of picking stocks we find that his alpha is insigificant?

That's like saying when you adjust for the fact that the New England patriots have a good coach, good quarterback, and good receivers they are a pretty mediocre team.
 
I don't interpret that way. All it means is that, his methods can be replicable provided one have access to cheap leverage.
 
You must log in or register to reply here.
Back
Top