# All equity, high returns, low drawdowns



## MrBlackhill

This evening I was playing around with a few stocks taken from my US watchlist. I was playing around with only 25 US stocks that have been there for at least 30 years.

And then I was wondering "ok, some people are risk-averse and it's ok, but what if a combination of stocks would provide high returns with low drawdowns?".

The goal is to use uncorrelated stocks which have good upside volatility. Since they are uncorrelated, when one stock is down, another one is up. Since they have good upside volatility, the upside movement overtakes the downside movement.

Sure, most of the stocks I selected crashed hard at some point, but the portfolio as a whole didn't crash as much, which is the goal. If the risk-averse investor looks at his individual stocks, it's definitely not a good idea, but if he looks at his overall portfolio, he can still sleep at night (depending on how much risk-averse he is).

Anyways, here's the results :





Backtest Portfolio Asset Allocation


Analyze and view backtested portfolio returns, risk characteristics, standard deviation, annual returns and rolling returns



www.portfoliovisualizer.com





*EDIT*: See also this post for another combination.
*EDIT #2*: See also this post for a study on a very small set of stocks.

There are 3 portfolios because the 2nd is constrained to 20% and the 3rd is constrained to 10%. I did this because even though the 1st portfolio is the best against drawdowns, it holds 40% ABT, which is a lot. ABT has been such a great stock and the company has been there since 1888, but I can understand that some people don't want to hold 40% in a single stock.

Those 3 portfolios averaged around 20% CAGR since 1990. Actually, on a 15-year rolling window, it's more about 16% to 18% CAGR. Still an awesome performance. Actually, even the lowest 15-year return was about 14% CAGR! Then there's the maximum drawdowns. They are ranging from about -16% to -21%. That's pretty good, actually. Why do I say it's good? Let's take a look at some of the classics. In the same timeframe :

the permanent portfolio averaged around 7.5% CAGR with a maximum drawdown of about -13%
a 40% equity / 60% bonds averaged around 8% CAGR with a maximum drawdown of about -19%
a 60% equity / 40% bonds averaged around 9% CAGR with a maximum drawdown of about -31%
those portfolios averaged about 7% to 7.4% CAGR over a 15-year window

In 15 years, $10 000 invested becomes $71 379 at 14% CAGR.
In 15 years, $10 000 invested becomes $29 178 at 7.4% CAGR.






Backtest Portfolio Asset Class Allocation


Analyze and view portfolio returns, sharpe ratio, standard deviation and rolling returns based on historical asset class returns and the given asset allocation



www.portfoliovisualizer.com





That's not a big analysis as I only played around with a few stocks, but imagine those managers which have access to so many tools... They certainly can come up with an ever better combination with more stocks (maybe 30), more sector diversification and more geographic diversification, which are all tools to mitigate the risks and drawdowns without affecting the returns. So far, the only very best ETF I've found is DXG.TO (when search on the US and an the Canadian side), but it is very young... it hasn't seen a truly big crash yet.

If you are curious of my initial list of 25 US stocks :





Backtest Portfolio Asset Allocation


Analyze and view backtested portfolio returns, risk characteristics, standard deviation, annual returns and rolling returns



www.portfoliovisualizer.com


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## Just a Guy

You’re treading on sacrilegious territory black hill..the faithful don’t like to be challenged and proof is really bad to bring out.


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## james4beach

My concern with this kind of thing is that it may be just hindsight knowledge. Imagine a universe of thousands of stocks, each with random behaviour (so in this illustration imagine there are no corporate effects, but they are all just "statistical" stocks consisting of an equity upward bias similar to the broad market + plenty of volatility along the way).

You could also mine that database and find stocks that achieve better than index returns, with lower drawdowns. You could then construct portfolios with the same characteristics you have demonstrated here... it's a trivial exercise, if you have a large enough universe of stocks.

That's the hindsight issue. Does the result mean anything? Would the stock picks achieve the same magical result _going forward_?

I did something similar with my 5-pack, after all. I decided on a stock picking approach which back-tests showed had superior risk-vs-reward than the index. All I can say is that I hope it will work, and I hope that the pattern of the last X years continues ... but I won't be surprised if it doesn't work out like that.


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## Jimmy

james4beach said:


> My concern with this kind of thing is that it may be just hindsight knowledge. Imagine a universe of thousands of stocks, each with random behaviour (so in this illustration imagine there are no corporate effects, but they are all just "statistical" stocks consisting of an equity upward bias similar to the broad market + plenty of volatility along the way).
> 
> You could also mine that database and find stocks that achieve better than index returns, with lower drawdowns. You could then construct portfolios with the same characteristics you have demonstrated here... it's a trivial exercise, if you have a large enough universe of stocks.
> 
> That's the hindsight issue. Does the result mean anything? Would the stock picks achieve the same magical result _going forward_?
> 
> I did something similar with my 5-pack, after all. I decided on a stock picking approach which back-tests showed had superior risk-vs-reward than the index. All I can say is that I hope it will work, and I hope that the pattern of the last X years continues ... but I won't be surprised if it doesn't work out like that.


I used to think that too that these 60/40 mix type portfolios were the way to go but they aren't unless you like 6%/yr market like returns. That is the problem w indexes , you get a mix of all the mediocre and lousy stocks dragging down the stars. Same for doing sector momentum rotation to beat the market. It works but there are easier and better ways to make $.

With a little research stock picking is the way to go. I am on the Motely Fool subscription service and their picks in total all ~ 170 of them have made an average return of 5X the market over a portfolio w the oldest stocks 7 yrs. . Their stocks aren't just all high growth either but a mix of everything by style , size and sector for all types of investors. But I am now making as many picks and specific ETFs on my own.

These stocks don't have 'random' behavior either. A stock like Amazon has been growing consistently 178% for 10 years. Growth has been slowing but it is still producing 50%/yr returns now and forecasted as they are a major player in cloud architecture. You have to pick the right stocks/ETFs and the right industries. It is work and requires a lot of research but it can be done . I have found this and I just started 6 months ago and am still a novice but would encourage this to anyone.


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## off.by.10

I'd be more interested in the results if you did the same with data from say, 40 to 20 years ago. And then looked at how the result performed in the next 20 years. Otherwise, like james said, it's mostly hindsight. And even with that change it still very much is. You could skip all the work and just say "buy apple" or something like that.


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## Covariance

Perhaps an untainted way of assessing your potential alpha is to write down the actual rules for security selection. IE the mechanical, unambiguous selection criteria for the stocks in the portfolio. Also define the rebalance and exit rules. Apply the rules to determine the initial portfolio (at some point in the past). Apply the rebalance and exit rules mechanically over the years. Look at your returns.

Probably use the information ratio to assess.


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## Covariance

One other comment. Not to get to philosophical but something to think about - Indexes other than entire market are actually security selection. Someone, or some set of rules, selected the stocks in the index.


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## fireseeker

Jimmy said:


> I am on the Motely Fool subscription service and their picks in total all ~ 170 of them have made an average return of 15%/yr (or ~ 5X the market) while the market has returned just ~ 3%/yr over the past 7 years.


What market has returned just 3% a year for the last seven years??

The S&P500 has returned 10.8%, starting in December, 2013.


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## Jimmy

fireseeker said:


> What market has returned just 3% a year for the last seven years??
> 
> The S&P500 has returned 10.8%, starting in December, 2013.


That is their record from when the stocks were purchased vs buying the TSX or S&P index at the time. They are ~ 50/50 US/CDN stocks . They all weren't purchased 7 years ago. They were purchased 1 US, 1 CDN stock each month over a 7 year period from 2013.


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## james4beach

Jimmy said:


> With a little research stock picking is the way to go. I am on the Motely Fool subscription service and their picks in total all ~ 170 of them have made an average return of 15%/yr (or ~ 5X the market) while the market has returned just ~ 3%/yr over the past 7 years.


The last 7 years have been an extremely strong period for the stock market, quite a historical outlier. I agree that it's possible to do well with stock picking, but you should be cautious about becoming overconfident in your approach. This recent decade in the stock market has been very steady and smooth, with huge gains. It's not always like this.



Covariance said:


> Perhaps an untainted way of assessing your potential alpha is to write down the actual rules for security selection. IE the mechanical, unambiguous selection criteria for the stocks in the portfolio. Also define the rebalance and exit rules.


I agree, this is the way to go. I used do ad-hoc stock picking many years ago and it never worked out for me. I've been getting much better results ever since I went the route you describe, with explicit criteria including portfolio management rules. This is what my 5-pack uses as well: strictly defined selection and management criteria.


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## Jimmy

james4beach said:


> The last 7 years have been an extremely strong period for the stock market, quite a historical outlier. I agree that it's possible to do well with stock picking, but you should be cautious about becoming overconfident in your approach. This recent decade in the stock market has been very steady and smooth, with huge gains. It's not always like this.


Not the case here. They have been beating the market like this w a similar record since the service started in 1995 actually. They just track a ~ 7 year horizon. They buy and sell their holdings over that period some are rebuys.

Still you could have bought Amazon and Netflix, or even Brookfield Asset management in 2003 and destroyed the market if you want a longer time period. The market generally has poor returns and w a little work it isn't too hard to pick some top performers. I don't know how many x I have seen articles praising Brookfield for example over the years.


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## james4beach

Jimmy said:


> Their have been beating the market like this w a similar record since teh service started in 1995 actually. They just track a ~ 7 year horizon. They buy and sell their holdings over that period some are rebuys. You could have bought Amazon and Netflix, even Brookfield Asset management in 2003 and destroyed the market.


That is also a hindsight trick. This is the classic "newsletter" hindsight stock picking game.

It's one of the oldest games in the stock market. I've got to run to an appointment but I suggest googling for: newsletter stock picking hindsight, survivorship bias

Fooled By Randomness covers this concept quite well too.


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## Jimmy

james4beach said:


> That is also a hindsight trick. This is the classic "newsletter" hindsight stock picking game.
> 
> It's one of the oldest games in the stock market. I've got to run to an appointment but I suggest googling for: newsletter stock picking hindsight, survivorship bias
> 
> Fooled By Randomness covers this concept quite well too.


That is just dismissive and uninformed. Maybe there are other actual newsletters as you claim but this isn't one of them

They aren't picking in hindsight, they are picking and tracking in real time as I explained already. They again list the stock price at the time they buy and the TSX or S&P index at the same time and track returns from that period to present date. Their picks always don't make money and they are transparent enough to show it.

As Mr B and MF have shown good stock picking offers much better returns for similar risk.


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## james4beach

Jimmy said:


> No it isn't and you clearly don't know about their service . They aren't picking in hindsight. They are picking and tracking in real time as I explained already.


They are just one of a million other newsletters in existence. That's the trick you don't understand.

For every newsletter like this, there are 100 others that didn't work out. Where are those newsletters? Who is talking about them? Why aren't we discussing them now? They fade away into blackness...

What remains and gets the spotlight are the newsletters with good results. So you post about them and talk about them here. Yes those results are legitimate, but they are also largely meaningless, because when you have 1,000,000 newsletters in existence with another 20,000 created each year there will ALWAYS be one with an amazing stock picking track record.

That's the trick. It's the same trick active managers play, with 200 mutual funds the firm offers, where 10 disappear every year, and another 10 are added every year. The same old trick in Wall Street for the last 100 years ... survivorship bias, which gives the perception of stock-picking success.


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## Jimmy

james4beach said:


> They are just one of a million other newsletters in existence. That's the trick you don't understand.
> 
> For every newsletter like this, there are 100 others that didn't work out. Where are those newsletters? Who is talking about them? Why aren't we discussing them now? They fade away into blackness...
> 
> What remains and gets the spotlight are the newsletters with good results. So you post about them and talk about them here. Yes those results are legitimate, but they are also largely meaningless, because when you have 1,000,000 newsletters in existence with another 20,000 created each year there will ALWAYS be one with an amazing stock picking track record.
> 
> That's the trick. It's the same trick active managers play, with 200 mutual funds the firm offers, where 10 disappear every year, and another 10 are added every year. The same old trick in Wall Street for the last 100 years ... survivorship bias, which gives the perception of stock-picking success.


First of all they are the top stock picking service on the market and have been successful since the mid 90s. I don't know or care about these other supposed newsletters you are mentioning. The results aren't meaningless. Mr B showed you a sample of stocks that can easily beat the market. I can show you theirs or you could just buy BAM and find out for yourself.

No they don't have survivorship bias. Again they track all their stocks the winners and losers vs teh index from the time of purchase to current date and have sell recommendations too.

I hope that helps.


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## Covariance

james4beach said:


> I agree, this is the way to go. I used do ad-hoc stock picking many years ago and it never worked out for me. I've been getting much better results ever since I went the route you describe, with explicit criteria including portfolio management rules. This is what my 5-pack uses as well: strictly defined selection and management criteria.


I would be interested in knowing if you automated the rules in a spreadsheet with macros or some such background running system outside your control to force awareness when deviating. Sometimes with the best of intentions we allow our emotions to drive a deviation from the plan.

Also, due to a limitation here I can not access your link. Are your strategies all market or do you have regime signals and triggers? Certain strategies work better or completely fall apart in different environments.


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## Rusty O'Toole

So far this year my trading account is up 44.64% on the one trade I told you about earlier. My biggest drawdown (temporary) was 10% or so, and that was after a big run up so it did not dent my original account. In other words the 10% reduced the profit on the trade. Normally I leg into a trade, risking no more than 1% or 2% of my account.
If I wasn't so cautious I could have made multiples of that. Having done this trade now for 3 years I have confidence in it, and expect to do better next year.


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## Rusty O'Toole

Duplicate post


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## Just a Guy

Plenty of people are successful stock pickers who totally avoid bonds. For some people this is really difficult because they are too scared to even try it. Those of us who do it, tend to do very well, but the zealots don’t want to believe it’s even possible and will spend hours generating charts to “prove” why it can’t be done.


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## MrBlackhill

off.by.10 said:


> I'd be more interested in the results if you did the same with data from say, 40 to 20 years ago. And then looked at how the result performed in the next 20 years. Otherwise, like james said, it's mostly hindsight. And even with that change it still very much is. You could skip all the work and just say "buy apple" or something like that.


Sure, you are absolutely right. Let me do a Google search using date constraints.

This was written in 2007, a list of "the 50 best stocks in the world". That'll be my playground. Since I haven't build that list, I'm pretty limited because maybe I would've come up with a different list back in 2007, but unfortunately I don't have tools to screen stocks in the context of 2007.






The 50 Best Stocks in the World


This long-term portfolio outpaces the S&P and Nasdaq.




www.thestreet.com





Anyways, I'll still try something. First, I reduced the list to 25 stocks which had historical data starting from 1985, because I like to have a greater time span. (Note: NEE is formerly FPL)

Now, I tried to optimize the selection and the weighting of the stocks using only that data from 1985 to September 2007 (the moment the article was published).

Then, I backtested what happened with that selection from October 2007 until now. Note that this was right before the huge 2008 crash.

Here's the list, if you are curious : 25 of the list of the 50 best stocks as of 2007

Let's start with constraints to a max of 10% allocation : the results

10.78% CAGR vs 8.97% CAGR for SPY and 7.62% CAGR for SPY/AGG 60/40
-37.42% drawdown vs -50.80% for SPY and -30.31% for SPY/AGG 60/40
10-year average rolling return of 13.59% CAGR vs 12.26% CAGR for SPY and 9.10% CAGR for SPY/AGG 60/40

Let's continue with constraints to a max of 20% : the results

9.65% CAGR vs 8.97% CAGR for SPY and 7.62% CAGR for SPY/AGG 60/40
-31.46% drawdown vs -50.80% for SPY and -30.31% for SPY/AGG 60/40
10-year average rolling return of 12.88% CAGR vs 12.26% CAGR for SPY and 9.10% CAGR for SPY/AGG 60/40

Let's see other possible results with constraints to a max of 20% : the results

12.41% CAGR vs 8.97% CAGR for SPY and 7.62% CAGR for SPY/AGG 60/40
-37.06% drawdown vs -50.80% for SPY and -30.31% for SPY/AGG 60/40
10-year average rolling return of 15.20% CAGR vs 12.26% CAGR for SPY and 9.10% CAGR for SPY/AGG 60/40

Buffet has more than 40% allocated to AAPL only, let's skip the constraints and see three different outcomes.

The first outcome

14.39% CAGR vs 8.97% CAGR for SPY and 7.62% CAGR for SPY/AGG 60/40
-29.35% drawdown vs -50.80% for SPY and -30.31% for SPY/AGG 60/40
10-year average rolling return of 16.61% CAGR vs 12.26% CAGR for SPY and 9.10% CAGR for SPY/AGG 60/40

The second outcome

14.29% CAGR vs 8.97% CAGR for SPY and 7.62% CAGR for SPY/AGG 60/40
-30.43% drawdown vs -50.80% for SPY and -30.31% for SPY/AGG 60/40
10-year average rolling return of 16.80% CAGR vs 12.26% CAGR for SPY and 9.10% CAGR for SPY/AGG 60/40

The third outcome

12.84% CAGR vs 8.97% CAGR for SPY and 7.62% CAGR for SPY/AGG 60/40
-31.13% drawdown vs -50.80% for SPY and -30.31% for SPY/AGG 60/40
10-year average rolling return of 14.65% CAGR vs 12.26% CAGR for SPY and 9.10% CAGR for SPY/AGG 60/40

So... I've made a selection based only on a *very limited list* of 50 top picks that I've *found randomly* from 2007. I tested the outcome for the next 13 years, including a huge crash in 2008 and a smaller crash in 2020. The highly concentrated portfolios managed to average nearly twice the CAGR of a 60/40 portfolio while having the same drawdowns. Even if the results shown above are not as good as the results from the initial post (called out for hindsight bias), they are still outperforming the index with only a quick test of a no-brainer click on an "optimize" button, *which definitely doesn't capture a thorough strategy*.

Also, have you noted how some portfolios include picks which were not good performers such as NUE, VLO and XOM? And yet, their overall portfolio wasn't affected that much.

I would need to make many more case studies before concluding, but now we know that in just a few minutes I managed to build such a portfolio with no hindsight bias. In all cases, the outcome was never disastrous.

Just look at this worst case : the results

8.03% CAGR vs 8.97% CAGR for SPY and 7.62% CAGR for SPY/AGG 60/40
-42.69% drawdown vs -50.80% for SPY and -30.31% for SPY/AGG 60/40
10-year average rolling return of 11.00% CAGR vs 12.26% CAGR for SPY and 9.10% CAGR for SPY/AGG 60/40

It's holding 10% AIG, 10% XOM and 6% NUE. Yet its average rolling return on a 5-year window has always outperformed the 60/40 portfolio. How to decide to drop and replace one of the stocks? I guess I'd reassess the strategy and its results once every few years.

Does that mean those portfolios are as low-risk as a 60/40 portfolio? *No, definitely not, they are much riskier, meaning that you must know what you're doing.* I was just showing that a stock-picker can certainly build a portfolio with high returns and low drawdowns. *I'm not saying that you should copy this "strategy".* It is not a strategy, just an observation. In 10 years from now, we'll see what has happened to the sample I provided in the initial post. Again, it was just a quick test, not a thorough strategy. That's why I believe that a thorough strategy can provide high returns with low drawdowns using 100% equities.



Covariance said:


> Perhaps an untainted way of assessing your potential alpha is to write down the actual rules for security selection. IE the mechanical, unambiguous selection criteria for the stocks in the portfolio. Also define the rebalance and exit rules. Apply the rules to determine the initial portfolio (at some point in the past). Apply the rebalance and exit rules mechanically over the years. Look at your returns.
> 
> Probably use the information ratio to assess.


Yes, absolutely. That is just a quick test and an observation. Building a strategy around it is much more complex. I like to combine fundamental analysis and technical analysis. I like to assess factors, trends, market psychology.


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## james4beach

Covariance said:


> I would be interested in knowing if you automated the rules in a spreadsheet with macros or some such background running system outside your control to force awareness when deviating. Sometimes with the best of intentions we allow our emotions to drive a deviation from the plan.


I couldn't automate the kind of back test I was running (for my 5-pack). The historical data that I use to drive my portfolio decisions is found in old annual reports including ancient financial statements from Barclays iUnits (the previous managers of XIU). I didn't want to bother inputting all of that into a spreadsheet, but I suppose I could have.

Instead I tried various strategies and simulated the resulting portfolio decisions by stepping through old financial statements, which gave me snapshots of the "state of the world". I think I did some pretty clean step-throughs and I double, triple, quadruple checked the results. I tried very hard to focus on making those portfolio decisions using quantitative metrics, using only what was known at that point in history.

These portfolios are not continuously monitored (the way you suggest) but rather, I have specific dates for portfolio reviews. You raise a valid point when you say that emotions can drive deviation from a plan ... this is definitely a risk, with my manual reviews. But I have worked hard to codify very strict portfolio rules and guidelines. Basically, I wrote them like software pseudo code, and I step through it like a computer.

As far as stock picking goes, I consider my 5-pack to be pseudo indexing because it's awfully similar to XIU. When all's said and done, it acts a lot like XIU so I hesitate to even call it stock picking. In reality, the TSX 60 decision committee does the stock picking work, and I mirror their choices.



Covariance said:


> Also, due to a limitation here I can not access your link. Are your strategies all market or do you have regime signals and triggers? Certain strategies work better or completely fall apart in different environments.


I use a smorgasbord of strategies... a little hedge fund of my own. It breaks down as 90% passive and 10% active so I'm mostly a passive indexer.

Within the 10% that's actively managed, there are a variety of strategies. Half, 5% are quantitative based portfolios (stock picking based on clear rules) but I do also have 5% in a market timing method that tries to respond to market strength and weakness, giving buy and sell signals.

I like having a variety of methods in play. As you can tell by my 90% passive indexing, I don't take the active methods too seriously but they are definitely fun, and they have contributed positively so far. The signal based method, for example, gave me a "sell" signal on March 9 before the worst of the crash, so this helped reduced my drawdown -- which is what I designed it to do.

It's been a VERY fun year for me


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## Karlhungus

fireseeker said:


> What market has returned just 3% a year for the last seven years??
> 
> The S&P500 has returned 10.8%, starting in December, 2013.


Im still trying to figure out what market he is referring to that only did 3% in that time.


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## fireseeker

Karlhungus said:


> Im still trying to figure out what market he is referring to that only did 3% in that time.


Yes, it's mysterious. I gather the Motley folks post buy alerts and compare their success with an index purchase done at the same time. A sequential series of purchases, in other words, not a straight CAGR.

Still, given what markets have done since 2013, I can't figure how a series of index purchases would have yielded only a 3% return. Something is missing or wrong about the methodology description.


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## Just a Guy

A large portion allocated to bonds could easily drag your returns down to only 3%. That combined with GICs and HISAs as some would advocate.


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## AltaRed

I believe it is website marketing mining a dataset. I've never trusted anything from that cast of characters.


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## Karlhungus

fireseeker said:


> Yes, it's mysterious. I gather the Motley folks post buy alerts and compare their success with an index purchase done at the same time. A sequential series of purchases, in other words, not a straight CAGR.
> 
> Still, given what markets have done since 2013, I can't figure how a series of index purchases would have yielded only a 3% return. Something is missing or wrong about the methodology description.


My guess is Motley fool just touted that return and jimmy just believed it without looking into it further.


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## Jimmy

Karlhungus said:


> My guess is Motley fool just touted that return and jimmy just believed it without looking into it further.


It is no great mystery. They mainly buy good stocks at good times. They bought Shopify March 9 2016 which is up 4,239% vs the TSX up 52% in the same period for ex. Or The trade Desk Aug 23 2017 up 1,803% vs the S&p up 29%. There are more familiar names too like CN, BNS, BAM, BIP, Disney Mastercard, BOYD, Alimenation etc.

Then took the avg of all the gains for all stocks vs those of the market bought at the same time. They are also selling stocks over the period so you can't use some simple CAGR. Again as I explained already to OP they have some stocks that also under performed the market so it is very transparent


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## MrBlackhill

A stock-picker could screen many stocks, looking for opportunities in stocks under the radar, trying to find the next stock that will skyrocket. Some may do a great job, others may not. It's a lot of work and it's hard to tell the probability of success. What if you pick 29 stocks that averaged -25% and 1 stock that soared +900%? That's +5.8% What if you pick 9 stocks that averaged -10% and 1 stock that soared +200%? That's "only" +11% overall. What if you pick 4 stocks that averaged +10% and 1 stock that soared +100%? That's +28%. But the winners won't soar every year, so you muss reassess every year for next picks. You may end up picking on one of the next big names or simply riding the momentum (see AcuityAds). Pretty hard to tell what will be the outcome, but it's definitely worth trying, in my opinion.

What if you just look at stocks which have had a long and proven history of growth? Past results don't guarantee future performance. Yet, some companies have proven their potential with their long track record. And when investors see a long track record of high growth, psychology kicks in, they want to be part of it, contributing to the stock performance until things turn south.

I guess there is the "passive" stock-picker and the "active" stock-picker. The "active" stock-picker screens a lot of stocks, reads a lot, analyses a lot, has an eye for the next trends and momentum opportunities. If he picks the right stocks like Shopify or The Trade Desk, he'll make a fortune in no time.

The "passive" stock-picker would simply look at the past, assess the current context and go long on stocks with a long track record. He'll most likely invest in stocks with limited growth potential as they've already been there for a long time, but the overall portfolio growth could still be pretty decent.

See, I have this list of 25 US stocks with a 30-year track record. They all went through various crashes, but they managed to get through it. I'm very curious of the outcome of simply investing equal-weight in those 25 US stocks. We'll see in 5-10 years from now. Someone starting with $10,000 and investing $5,000 each year at 20% CAGR will sit on $1.5M after 20 years, while having invested only $110,000 during those 20 years.






Backtest Portfolio Asset Allocation


Analyze and view backtested portfolio returns, risk characteristics, standard deviation, annual returns and rolling returns



www.portfoliovisualizer.com


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## Just a Guy

Funny, people don’t trust themselves to do the work required to pick out a few stocks, yet advocate buying etfs which are basically stock picks done by someone else. My bet is most of the people who put together the etfs don’t actually own them.


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## Spudd

Jimmy said:


> It is no great mystery. They mainly buy good stocks at good times. They bought Shopify March 9 2016 which is up 4,239% vs the TSX up 52% in the same period for ex. Or The trade Desk Aug 23 2017 up 1,803% vs the S&p up 29%.
> 
> Then took the avg of all the gains for both. They are also selling stocks over the period so you can't use some simple CAGR. Again as I explained already to OP they have some stocks that also under performed the market so it is very transparent


The question is how they got 3% for their benchmark. What is their benchmark?


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## Jimmy

Spudd said:


> The question is how they got 3% for their benchmark. What is their benchmark?


Their benchmarks are the TSX and the S&P 500. You can't look at cagr as they are adding ~ 24 stocks /year and are selling stocks in this period too.


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## andrewf

If you had a copy of tomorrow's newspaper, wouldn't you be able to achieve 0% drawdowns?


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## Jimmy

MrBlackhill said:


> A stock-picker could screen many stocks, looking for opportunities in stocks under the radar, trying to find the next stock that will skyrocket. Some may do a great job, others may not. It's a lot of work and it's hard to tell the probability of success. What if you pick 29 stocks that averaged -25% and 1 stock that soared +900%? That's +5.8% What if you pick 9 stocks that averaged -10% and 1 stock that soared +200%? That's "only" +11% overall. What if you pick 4 stocks that averaged +10% and 1 stock that soared +100%? That's +28%. But the winners won't soar every year, so you muss reassess every year for near picks. You may end up picking on one of the next big names or simply riding the momentum (see AcuityAds). Pretty hard to tell what will be the outcome, but it's definitely worth trying, in my opinion.


That is why reading analysts reports on companies is so valuable. Regular investors can see momentum trends and other postiives about a company but the people who study stocks for a living know much more about the background or the story of the company , how competitive it is in its industry and other considerations etc.

Acuity is a good example. It is in the same business as the Trade Desk but was much more reasonably valued and there were many advisors and fellow investors recommending it. That is why I don't mind getting a little advice and insight into businesses I know less about.


----------



## james4beach

Funny, I don't remember hearing about this particular newsletter in previous years. But I do remember hearing a lot of another one, the BTSX. It has been mentioned several times here over the last few years and often pops up when people talk about how easy it is to outperform the TSX index.

For consistency, and to know we're not playing a hindsight game, let's look at BTSX. I added performance figures for 2019 and 2020 to this older thread.

In 2019, back when BTSX was still a hot idea, the BTSX beat the TSX by a few percent. But in 2020 YTD, it's done horribly versus the index.

The two year cumulative result (Jan 1, 2019 - Dec 18, 2020) is as follows:
BTSX +16.0%
XIC +30.2%

The XIC index has *double* the performance of BTSX over the last two years. The stock picking was a complete failure.

If you keep your eyes on one particular newsletter and track its _forward_ performance, the results may not be so great. Would you stock pickers now agree that it isn't so easy to beat the TSX? And if you still insist it's so easy, why did the BTSX have only half the performance of the TSX over two years?


----------



## Jimmy

That is just anecdotal. You are just risk averse which is fine . But you will find you could throw a rock over your shoulder and hit 50 tech companies or ETFs that will easily grow in multiples of the market index


----------



## Karlhungus

Jimmy said:


> It is no great mystery. They mainly buy good stocks at good times. They bought Shopify March 9 2016 which is up 4,239% vs the TSX up 52% in the same period for ex. Or The trade Desk Aug 23 2017 up 1,803% vs the S&p up 29%. There are more familiar names too like CN, BNS, BAM, BIP, Disney Mastercard, BOYD, Alimenation etc.
> 
> Then took the avg of all the gains for both. They are also selling stocks over the period so you can't use some simple CAGR. Again as I explained already to OP they have some stocks that also under performed the market so it is very transparent


Im saying where did they get the 3% from. You said originally it was 3%, now you are saying 52%. Im just trying to clarify as I dont understand these numbers. Also, its not difficult to calculate CAGR with multiple trades within a time period. 

It seems like (and I could be wrong of course) that Motley fool will cherry pick a time period to show how crappy the index did, at the same time cherry picking their own gains and claiming they dont have a calculated CAGR because "its too difficult to figure out"

I have my doubts, but am open to different strategies. If Motley fool posted their CAGR for the last, 10/15 years, we could compare it better.


----------



## Karlhungus

Jimmy said:


> That is just anecdotal. You are just risk averse which is fine . But you will find you could throw a rock over your shoulder and hit 50 tech companies or ETFs that will easily grow in multiples of the market index


Dangerous talk


----------



## Jimmy

Karlhungus said:


> Im saying where did they get the 3% from. You said originally it was 3%, now you are saying 52%. Im just trying to clarify as I dont understand these numbers. Also, its not difficult to calculate CAGR with multiple trades within a time period.
> 
> It seems like (and I could be wrong of course) that Motley fool will cherry pick a time period to show how crappy the index did, at the same time cherry picking their own gains and claiming they dont have a calculated CAGR because "its too difficult to figure out"
> 
> I have my doubts, but am open to different strategies. If Motley fool posted their CAGR for the last, 10/15 years, we could compare it better.


No I am not saying that. Again like the two examples I provided the returns are calculated for the stock and the market index bought at the same time to present date. This is done for all the stocks they hold then averaged to give an avg stock return and an avg mkt return.


----------



## MrBlackhill

james4beach said:


> If you keep your eyes on one particular newsletter and track its _forward_ performance, the results may not be so great. Would you stock pickers now agree that it isn't so easy to beat the TSX? And if you still insist it's so easy, why did the BTSX have only half the performance of the TSX over two years?


Oops, I wanted to reply in this thread instead. Anyways, my reply is here.

Portfolios with high returns will also have some years where it performed worse than the index, it's simply the global volatility of the risk-return.

What's a few bad years when the 30-year track record is 12% CAGR against 9% CAGR?

Sticking to a strategy will depend on your reassessment, your risk tolerance and your belief in the strategy.









BTSX results — DividendStrategy.ca


A 30+ year track record As of the end of 2021, the 30-year average rate of return using the “Beating the TSX” method was 13.13%. To put this in context, the benchmark index rate of return was 10.46% over the same time period. There is not a single mutual fund in Canada with a track […]




dividendstrategy.ca


----------



## Karlhungus

Jimmy said:


> No I am not saying that. Again like the two examples I provided the returns are calculated for the stock and the market index bought at the same time to present date. This is done for all the stocks they hold then averaged to give an avg stock return and an avg mkt return.


Again, what are you referring to when you say the market "returned 3% over those years"


----------



## Jimmy

Karlhungus said:


> Again, what are you referring to when you say the market "returned 3% over those years"





Jimmy said:


> Their benchmarks are the TSX and the S&P 500. You can't look at cagr as they are adding ~ 24 stocks /year and are selling stocks in this period too.


Each year they add 12 Cdn amd 12 US stocks to their portfolio and measure the returns from that time to present vs the TXS or S& P depdening on the stock. They do this for the past 7 years as a revolving portfolio so there is no longer period. You just buy and sell some or all of the stocks they recommend.


----------



## Karlhungus

Jimmy said:


> Each year they add 12 Cdn amd 12 US stocks to their portfolio and measure the returns from that time to present vs the TXS or S& P depdening on the stock. They do this for the past 7 years as a revolving portfolio so there is no longer period. You just buy and sell some or all of the stocks they recommend.


Okay this is starting to get comical. So what is 3% a year ???? For the last 7 years a combo of TSX and US index is far more then 3% per year.


----------



## Jimmy

Karlhungus said:


> Okay this is starting to get comical. So what is 3% a year ???? For the last 7 years a combo of TSX and US index is far more then 3% per year.


The 3% has been explained to you 3x but I'll clarify again and a little more. The total return of the market (combo of 50/50 Tsx and S&P) was 25%. The period is 7 years. We divided by 7 to get 3% for the market but that is faulty .

It looks like the avg time they have held a stock is more like 3.5 yrs. (Some were bought 7 yrs ago, some 1 month ago for ex) . So the avg market return would be more like 6%.

The pt is their stocks beat the market by a factor of 4. The total returns of all their stocks was 102% vs 25% for the market.


----------



## Karlhungus

Jimmy said:


> The 3% has been explained to you 3x but I'll clarify again and a little more. The total return of the market (combo of 50/50 Tsx and S&P) was 25%. The period is 7 years. We divided by 7 to get 3% for the market but that is faulty .
> 
> It looks like the avg time they have held a stock is more like 3.5 yrs. (Some were bought 7 yrs ago, some 1 month ago for ex) . So the avg market return would be more like 6%.
> 
> The pt is their stocks beat the market by a factor of 4. The total returns of all their stocks was 102% vs 25% for the market.


No, this is the first time you have bothered to explain this 3% and I can see why, because it is not even close to correct. 50% US/CAN would have yielded closer to 11% CAGR. Backtest Portfolio Asset Allocation. The total return for that period would be just over 100%. So for all the trading, holding, selling, etc that Motley fool does, (plus fees, monthly subscription fees) you would have been better off with an index fund.


----------



## Pluto

MrBlackhill said:


> That's not a big analysis as I only played around with a few stocks, but imagine those managers which have access to so many tools... They certainly can come up with an ever better combination with more stocks (maybe 30), more sector diversification and more geographic diversification, which are all tools to mitigate the risks and drawdowns without affecting the returns. So far, the only very best ETF I've found is DXG.TO (when search on the US and an the Canadian side), but it is very young... it hasn't seen a truly big crash yet.


DXG.T is a good find. That's an etf I could be interested in. Most etf's bore me. The covid crash was significant. 

Anyway, my prediction is you are going to make a ton of $ in stocks in your lifetime. You have the right temperament and motivation to educate yourself.


----------



## Jimmy

Karlhungus said:


> No, this is the first time you have bothered to explain this 3% and I can see why, because it is not even close to correct. 50% US/CAN would have yielded closer to 11% CAGR. Backtest Portfolio Asset Allocation. The total return for that period would be just over 100%. So for all the trading, holding, selling, etc that Motley fool does, (plus fees, monthly subscription fees) you would have been better off with an index fund.


No, it has been explained 5x in this thread. *Again you can't use cagr over 7 years - it is faulty.* *They are buying 2 stocks /month for a 7 year period not holding the portfolio for 7 years.* I just explained this to you . The period is more like 3.5 years.

All you have to know is their stock returns average 102% the market returns were 25%. I showed you 2 examples of the calculations. Either way we are done here


----------



## Karlhungus

Jimmy said:


> No, it has been explained 5x in this thread and you can't or wont read properly so again and for the last time you can't use cagr over 7 years - it is faulty. They are buying 2 stocks /month for a 7 year period not holding the portfolio for 7 years. I just explained this to you . The period is more like 3.5 years.
> 
> All you have to know is their stock returns average 102% the markets were 25%. I showed you 2 examples of the calculations. You are welcome to verify them


You buy a stock in january. It goes up 10%. You sell it February. You sit on that cash for the rest of the year. What is your rate of return ?


----------



## MrBlackhill

Karlhungus said:


> So for all the trading, holding, selling, etc that Motley fool does, (plus fees, monthly subscription fees) you would have been better off with an index fund.


I don't use Motley Fool (yet), but they are definitely doing good since decades. We can start another thread for this debate.

Let's see what others say:








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The Motley Fool Stock Advisor has won our Award for the best stock newsletter. See our analysis of their performance over the last 5 years.




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Motley Fool Review, December 2022: Is Stock Advisor Worth It?


Motley Fool Review UPDATED December, 2022 reveals 6 years of Motley Fool Stock Advisor picks. Is it worth it? You must see my results.




www.wallstreetsurvivor.com














This guy has documented his personal experience:


----------



## Jimmy

Here are some more reviews. One of the best stock picking services.






19 Best Stock Market Investment News, Analysis & Research Sites of 2022


What are the best online resources for stock market investment analysis? See this list of the top websites for investing news and research.




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Are you satisfied with average investment returns? If not, these stock picking services seek to help you gain an edge on the market and outperform.




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In this Motley Fool Stock Advisor review 2022, you'll learn what you need to know to determine if the stock pick newsletter service is worth the cost.




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Motley Fool Review - Can You Trust the Stock Advisor Program?


Looking for stocks that outperform the market? We did an in-depth review of Motley Fool to see if the Stock Advisor program was legit or a scam.




toptradereviews.com


----------



## Just a Guy

Not sure what all the debate is about, there is only one strategy that matters, the one you implement. If you sit around for months analyzing different strategies you’ll make nothing guaranteed. If you never pick a strategy, it doesn’t matter a lick how they did in the past, in fact it never matters what they did in the past, it only matters if you implement the strategy and how it performs going forward.

I see this as a case of analysis paralysis with people too afraid to pull the trigger.


----------



## MrBlackhill

Just a Guy said:


> Not sure what all the debate is about, there is only one strategy that matters, the one you implement. If you sit around for months analyzing different strategies you’ll make nothing guaranteed. If you never pick a strategy, it doesn’t matter a lick how they did in the past, in fact it never matters what they did in the past, it only matters if you implement the strategy and how it performs going forward.
> 
> I see this as a case of analysis paralysis with people too afraid to pull the trigger.


I agree with you.

I think it's worth trying to chase the extra returns when you have the temperament and the motivation. Though I acknowledge that it's not for everybody.

Say we have these 4 scenarios

I invest an initial amount of $25,000, I add $5,000 every year, I make 7% CAGR for 20 years and I end up with $316,000
I invest an initial amount of $50,000, I add $5,000 every year, I make 7% CAGR for 20 years and I end up with $413,000
I invest an initial amount of $25,000, I add $10,000 every year, I make 7% CAGR for 20 years and I end up with $535,000
I invest an initial amount of $50,000, I add $10,000 every year, I make 7% CAGR for 20 years and I end up with $632,000
I invest an initial amount of $25,000, I add $5,000 every year, I make 12% CAGR for 20 years and I end up with $644,000
Learning about stocks, screening for stocks, selecting stocks, watching them, working on our temperament may be a lot of work as some say, but if that brings you a few extra percentage points on the long run, it's worth the effort. If one can achieve 12% CAGR instead of 7% CAGR over 20 years, it's a huge difference and it's definitely doable.

In my scenarios above, you need to save twice as much during 20 years if you average 7% CAGR vs 12% CAGR. If I want to save twice as much, I need either to be very frugal or to find another job. I prefer learning about stocks and trying out my luck implementing my own strategy. Obviously, those scenarios are biased as I selected those specific numbers to make it work, yet I used pretty realistic numbers, in my opinion.

All that being said, not everybody is thrilled about stocks, not everybody has the skills, the temperament and motivation to achieve a better performance. We all have our strengths, weaknesses and interests and it's ok. For instance, some people are physicians making more money than I ever will through investing. As long as we enjoy our way to make a living.


----------



## Karlhungus

MrBlackhill said:


> I don't use Motley Fool (yet), but they are definitely doing good since decades. We can start another thread for this debate.
> 
> Let's see what others say:
> 
> 
> 
> 
> 
> 
> 
> 
> Motley Fool Review: The Stock Advisor Picks Doubled my Money in 2020
> 
> 
> The Motley Fool Stock Advisor has won our Award for the best stock newsletter. See our analysis of their performance over the last 5 years.
> 
> 
> 
> 
> education.howthemarketworks.com
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 
> Motley Fool Review, December 2022: Is Stock Advisor Worth It?
> 
> 
> Motley Fool Review UPDATED December, 2022 reveals 6 years of Motley Fool Stock Advisor picks. Is it worth it? You must see my results.
> 
> 
> 
> 
> www.wallstreetsurvivor.com
> 
> 
> 
> 
> 
> View attachment 20975
> 
> 
> This guy has documented his personal experience:
> View attachment 20974





MrBlackhill said:


> I don't use Motley Fool (yet), but they are definitely doing good since decades. We can start another thread for this debate.
> 
> Let's see what others say:
> 
> 
> 
> 
> 
> 
> 
> 
> Motley Fool Review: The Stock Advisor Picks Doubled my Money in 2020
> 
> 
> The Motley Fool Stock Advisor has won our Award for the best stock newsletter. See our analysis of their performance over the last 5 years.
> 
> 
> 
> 
> education.howthemarketworks.com
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 
> Motley Fool Review, December 2022: Is Stock Advisor Worth It?
> 
> 
> Motley Fool Review UPDATED December, 2022 reveals 6 years of Motley Fool Stock Advisor picks. Is it worth it? You must see my results.
> 
> 
> 
> 
> www.wallstreetsurvivor.com
> 
> 
> 
> 
> 
> View attachment 20975
> 
> 
> This guy has documented his personal experience:
> View attachment 20974


Thanks for the info. Interesting.


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## Karlhungus

MrBlackhill said:


> I agree with you.
> 
> I think it's worth trying to chase the extra returns when you have the temperament and the motivation. Though I acknowledge that it's not for everybody.
> 
> Say we have these 4 scenarios
> 
> I invest an initial amount of $25,000, I add $5,000 every year, I make 7% CAGR for 20 years and I end up with $316,000
> I invest an initial amount of $50,000, I add $5,000 every year, I make 7% CAGR for 20 years and I end up with $413,000
> I invest an initial amount of $25,000, I add $10,000 every year, I make 7% CAGR for 20 years and I end up with $535,000
> I invest an initial amount of $50,000, I add $10,000 every year, I make 7% CAGR for 20 years and I end up with $632,000
> I invest an initial amount of $25,000, I add $5,000 every year, I make 12% CAGR for 20 years and I end up with $644,000
> Learning about stocks, screening for stocks, selecting stocks, watching them, working on our temperament may be a lot of work as some say, but if that brings you a few extra percentage points on the long run, it's worth the effort. If one can achieve 12% CAGR instead of 7% CAGR over 20 years, it's a huge difference and it's definitely doable.
> 
> In my scenarios above, you need to save twice as much during 20 years if you average 7% CAGR vs 12% CAGR. If I want to save twice as much, I need either to be very frugal or to find another job. I prefer learning about stocks and trying out my luck implementing my own strategy. Obviously, those scenarios are biased as I selected those specific numbers to make it work, yet I used pretty realistic numbers, in my opinion.
> 
> All that being said, not everybody is thrilled about stocks, not everybody has the skills, the temperament and motivation to achieve a better performance. We all have our strengths, weaknesses and interests and it's ok. For instance, some people are physicians making more money than I ever will through investing. As long as we enjoy our way to make a living.


Well said


----------



## AltaRed

I only


MrBlackhill said:


> I agree with you.
> 
> I think it's worth trying to chase the extra returns when you have the temperament and the motivation. Though I acknowledge that it's not for everybody.
> 
> Say we have these 4 scenarios
> 
> I invest an initial amount of $25,000, I add $5,000 every year, I make 7% CAGR for 20 years and I end up with $316,000
> I invest an initial amount of $50,000, I add $5,000 every year, I make 7% CAGR for 20 years and I end up with $413,000
> I invest an initial amount of $25,000, I add $10,000 every year, I make 7% CAGR for 20 years and I end up with $535,000
> I invest an initial amount of $50,000, I add $10,000 every year, I make 7% CAGR for 20 years and I end up with $632,000
> I invest an initial amount of $25,000, I add $5,000 every year, I make 12% CAGR for 20 years and I end up with $644,000
> Learning about stocks, screening for stocks, selecting stocks, watching them, working on our temperament may be a lot of work as some say, but if that brings you a few extra percentage points on the long run, it's worth the effort. If one can achieve 12% CAGR instead of 7% CAGR over 20 years, it's a huge difference and it's definitely doable.
> 
> In my scenarios above, you need to save twice as much during 20 years if you average 7% CAGR vs 12% CAGR. If I want to save twice as much, I need either to be very frugal or to find another job. I prefer learning about stocks and trying out my luck implementing my own strategy. Obviously, those scenarios are biased as I selected those specific numbers to make it work, yet I used pretty realistic numbers, in my opinion.
> 
> All that being said, not everybody is thrilled about stocks, not everybody has the skills, the temperament and motivation to achieve a better performance. We all have our strengths, weaknesses and interests and it's ok. For instance, some people are physicians making more money than I ever will through investing. As long as we enjoy our way to make a living.


12% CAGR is assuming one can actually achieve substantial alpha above market returns on a sustained basis. On average, 50% will fail to meet even index returns, so while 12% CAGR may be doable by some, it does not remotely carry 50% certainty, and it is certainly not known in advance. What odds of success one is prepared to live with is up to each person. It is no more complex than that.

Believe in your own confidence but have a backup plan.

Added: It is actually harder than 50-50 to beat the market because relatively few stocks are out performers and 'lift all boats'. Why it is so hard to beat the market is a specific example of the last 20 years in the S&P500. The difference between 'average return' and 'median return' shows that only 26% of the S&P500 beat the index return. One would have to be a very successful (and lucky) stock picker to preferentially pick the 26% of the stocks that lift one's personal CAGR to that exceeding the index, and that is before costs. I know of no examination of the TSX Composite that examines average vs median of the Canadian market but one might assume it might directionally be in the same direction.


----------



## Just a Guy

Yes, but right now is a once in a decade opportunity to invest in the market, while you’ve been trying to find someone else’s “perfect” strategy you’ve missed out on high double, if not triple digit returns. My average returns for the past few months is well over 50%, many doubled or tripled. This kind of opportunity only comes around every 10 years or so...it’s almost been impossible not to make money lately... I fear, by the time you get started, it’ll be much easier to lose your shirt again.


----------



## MrBlackhill

AltaRed said:


> 12% CAGR is assuming one can actually achieve substantial alpha above market returns on a sustained basis. On average, 50% will fail to meet even index returns, so while 12% CAGR may be doable by some, it does not remotely carry 50% certainty, and it is certainly not known in advance. What odds of success one is prepared to live with is up to each person. It is no more complex than that.


Yet, even passive investors are making decisions which will affect greatly their returns.

First, what does it mean to beat the market? Is it beating S&P500? Beating NASDAQ? Beating TSX? Beating a world index?

And is the passive investor in a 60/40 portfolio? A 80/20? A 100/0? Or alternatives including gold?

Is there leverage? How much leverage?

If we say the average investor has a 60/40 portfolio which is 60% SPY and 40% AGG, while another passive investor is 80% QQQ and 20% AGG, they are not beating their respective index, but their choice had a huge effect on their return after 20 years.

If I talk about equities only, then "beating the index" means beating the returns of an index using the same type of equities, but that still doesn't mean you've had the best performance available in the market of indexes.

I mean, in the past 20 years, someone could be proud to have beaten the TSX, yet someone simply buying another index like SPY would have beaten the TSX. And again, someone buying QQQ would have beaten SPY.

Actually, the true equity index is the one tracked by VT (which has been beaten by SPY and QQQ) because it holds a gigantic amount of stocks all around the world, so it represents the whole stock market.

As for me, my benchmark is NASDAQ because it's the hot index of the past two decades. If I can't beat it with my stock picks, then I should just buy it.

One could even beat NASDAQ without any stock-picking... One could be ETF-picking using specialized indexes. (And I won't mention active ETFs as this is just someone else picking stocks instead of you, but if the managers are doing better than you, why not buy it? See DXG for instance)


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## AltaRed

Beating the market means how one's results measure against the benchmark relative to one's asset allocation. No difference than the relative benchmarks ETFs and mutual funds measure their performance against. If one's IPS tells them to stock pick 60% of their portfolio in Canadian stocks and 40% of their portfolion in Canadian bonds, then their benchmark is 60% of the TSX Composite and 40% of the Canadian aggregate bond index. It is not rocket science.


----------



## MrBlackhill

AltaRed said:


> Beating the market means how one's results measure against the benchmark relative to one's asset allocation.


I know it's not rocket science, but then what's the benchmark index I'm trying to beat if my portfolio is made of Canadian stocks, US stocks and various ETFs with worldwide exposure?

I guess that means I'm trying to beat FTSE Global All Cap? But what I want to beat is NASDAQ. Or any all world ETF (such as DXG). Or maybe ARKK. Because why would I be proud to beat FTSE Global All Cap with stock-picking when I'm aware that a simple ETF is already beating it? So I simply want to beat what's the best out there.

And DXG.TO's benchmark is MSCI World, so it's currently beating it easily and by far? And what is ARKK's benchmark? It's also MSCI World.

PS: I'm aware that DXG.TO and ARKK are all young and some cautious investors are waiting for them to prove their worth. But ETF-picking is like stock-picking, you can wait and miss the best of it. There's also HERO.TO, EDGE.TO, ZGQ.TO which are index-based. I know it's a custom index... Except for ZGQ which is just a very slight modification which has achieved a great result so far.

I just cannot acknowledge that the optimal algorithm for the best performance of an index is a simple market cap weighting. I believe that ZGQ is a proof.


----------



## AltaRed

Broad market indices are the basis of all benchmarks because they essentially represent the totality of a national or regional market. Stingy Investor uses one particular set of indices but one could substitute FTSE for MSCI and/or maybe one of the broad Russell indices or S&P500 for the USA. Anything else is a slice and dice not representing market totality.

Boutique ETFs may, or may not, beat a broad market index on a 10-20 year basis. It is what it is.


----------



## james4beach

MrBlackhill said:


> I don't use Motley Fool (yet), but they are definitely doing good since decades. We can start another thread for this debate.


If they really were such gurus, why would they bother with a stupid little newsletter? The claim is that David Gardner & Tom Gardner are among the best stock pickers on earth.

They could advise a hedge fund or multiple pension funds. With performance like that, they would beat the pants off everyone else and become the most successful [advisor to] a hedge fund. Or they'd become integral parts of the largest pension funds and sovereign wealth funds in the world, being paid many millions of $ in perpetuity. Enormous, ongoing fees for them.

They could displace the S&P and completely ruin the business model, make the S&P 500 obsolete, with their new and superior methodology. They could steal away all of S&P's indexing business and become kings of the portfolio management world.

WHY would they not bother with any of that and instead peddle their newsletter to mom & pop? For only $99 a year plus access to a members-only message forum. C'mon.

You're asking me to believe is that their portfolio management skills are so great that they have been beating the market for ~ 17 years by a huge margin. And yet ... they don't bring those skills to institutional money, which actually pays the big bucks.

All of this expertise, better than all the industry giants, better than all the pension funds on earth, can be yours for the low low price of $1.90 a week!

Something is wrong with this story.


----------



## Karlhungus

MrBlackhill said:


> I know it's not rocket science, but then what's the benchmark index I'm trying to beat if my portfolio is made of Canadian stocks, US stocks and various ETFs with worldwide exposure?
> 
> I guess that means I'm trying to beat FTSE Global All Cap? But what I want to beat is NASDAQ. Or any all world ETF (such as DXG). Or maybe ARKK. Because why would I be proud to beat FTSE Global All Cap with stock-picking when I'm aware that a simple ETF is already beating it? So I simply want to beat what's the best out there.
> 
> And DXG.TO's benchmark is MSCI World, so it's currently beating it easily and by far? And what is ARKK's benchmark? It's also MSCI World.
> 
> PS: I'm aware that DXG.TO and ARKK are all young and some cautious investors are waiting for them to prove their worth. But ETF-picking is like stock-picking, you can wait and miss the best of it. There's also HERO.TO, EDGE.TO, ZGQ.TO which are index-based. I know it's a custom index... Except for ZGQ which is just a very slight modification which has achieved a great result so far.
> 
> I just cannot acknowledge that the optimal algorithm for the best performance of an index is a simple market cap weighting. I believe that ZGQ is a proof.


I thought the NASDAQ had done pretty bad the last 15 years or so.


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## Karlhungus

james4beach said:


> If they really were such gurus, why would they bother with a stupid little newsletter? The claim is that David Gardner & Tom Gardner are among the best stock pickers on earth.
> 
> They could advise a hedge fund or multiple pension funds. With performance like that, they would beat the pants off everyone else and become the most successful [advisor to] a hedge fund. Or they'd become integral parts of the largest pension funds and sovereign wealth funds in the world, being paid many millions of $ in perpetuity. Enormous, ongoing fees for them.
> 
> They could displace the S&P and completely ruin the business model, make the S&P 500 obsolete, with their new and superior methodology. They could steal away all of S&P's indexing business and become kings of the portfolio management world.
> 
> WHY would they not bother with any of that and instead peddle their newsletter to mom & pop? For only $99 a year plus access to a members-only message forum. C'mon.
> 
> You're asking me to believe is that their portfolio management skills are so great that they have been beating the market for ~ 17 years by a huge margin. That would make them *better than all the hedge funds* that went up against (and lost) Buffett's famous bet, better than the S&P 500, etc. And yet ... they don't want to advise institutional money, which compensates far better than this?
> 
> Something is wrong with this story.


Ya heres a review of their fund. https://money.usnews.com/money/blogs/on-retirement/2012/10/04/motley-fools-foolish-advice


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## james4beach

Karlhungus said:


> Ya heres a review of their fund. https://money.usnews.com/money/blogs/on-retirement/2012/10/04/motley-fools-foolish-advice


Ah thanks, so it seems the brothers *do* have a mutual fund: Great America Fund, symbol: TMFGX

Well then it should be easy for them to blow away the index returns right? I'm sure they can do 5x as good as the market, right? I mean they are stock picking gurus, should be super easy for them to _prove it when managing real money._

The 10 year performance is 13.67% CAGR, which is after the 1.1% fee is taken into account.
IVV, the S&P 500 ETF 10 year performance is 13.80% CAGR

Portfolio Visualizer shows the comparison of the Motley Fool fund to a low cost index fund over 10 years, pretty good length of time

Great America Fund: 13.40% CAGR, sharpe ratio 0.84, sortino ratio 1.33
Plain old IVV ETF: 13.51% CAGR, sharpe ratio 0.96, sortino ratio 1.57

So there you go. The Motley Fool stock picks do about the same as the index but in fact, have a worse risk-adjusted return than the index.

Between these two, the S&P 500 is the superior investment.


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## MrBlackhill

AltaRed said:


> Boutique ETFs may, or may not, beat a broad market index on a 10-20 year basis. It is what it is.


At some point they will consistently beat the conventional market cap weighted index, and then market cap weighted indexes will be forgotten.

We are gathering more data as never before, we have computational power as never before and we keep improving optimisation algorithms.

Market cap weighting's purpose is not performance, it's just to be a representation of the overall market, simply meaning that they are ordered by size (duh, market cap) and that has nothing to do with performance.

Hell, I've just read on Wikipedia this about the DJIA: _Although it is one of the most commonly followed equity indices, many consider the Dow to be an inadequate representation of the overall U.S. stock market compared to broader market indices such as the S&P 500 Index or Russell 3000 because it includes only 30 large cap companies, is not weighted by market capitalization, and does not use a weighted arithmetic mean._

Yet, DIA's average rolling return beats SPY.

Market cap weighting is *not* optimized for performance (price weighting *neither*).


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## AltaRed

Market cap weighting is not supposed to be weighted for anything other than the market weight of its constituents (total float outstanding). Why is that so hard to understand? That is what a broad market index does. DJIA is not a broad market index and no one here, to my knowledge, has ever supported it, nor do the majority of investors invest in it. 

Optimizing for performance, algorithms, slicing and dicing is nothing more than recency bias on the latest fads. They are a fringe play with no broad following and never will because, by definition, they do not represent the broad market. They will fade with time, not the other way around. But good luck chasing them. Let's discuss this again in 2030 or 2040.


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## Jimmy

james4beach said:


> Ah thanks, so it seems the brothers *do* have a mutual fund: Great America Fund, symbol: TMFGX
> 
> Well then it should be easy for them to blow away the index returns right? I'm sure they can do 5x as good as the market, right? I mean they are stock picking gurus, should be super easy for them to _prove it when managing real money._
> 
> The 10 year performance is 13.67% CAGR, which is after the 1.1% fee is taken into account.
> IVV, the S&P 500 ETF 10 year performance is 13.80% CAGR
> 
> Portfolio Visualizer shows the comparison of the Motley Fool fund to a low cost index fund over 10 years, pretty good length of time
> 
> Great America Fund: 13.40% CAGR, sharpe ratio 0.84, sortino ratio 1.33
> Plain old IVV ETF: 13.51% CAGR, sharpe ratio 0.96, sortino ratio 1.57
> 
> So there you go. The Motley Fool stock picks do about the same as the index but in fact, have a worse risk-adjusted return than the index.
> 
> Between these two, the S&P 500 is the superior investment.
> 
> View attachment 20978


Sort of an apples to oranges misleading comparison .That mutual fund is Mid Cap first of all , holds stocks indefinitely and has 33 holdings so it is more like any other index. That isn't their investment approach at all in the services either. They have 10 core stocks in their main service that they aren't going to divulge to the world. 

Their portfolios are also designed for a 5 year hold and are rotating. You saw the chart w an apples to apples comparison of their advisor holdings already. The one where the returns were 5x the market. Maybe you should just google some real reviews of their services if you want to really understand what they do.


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## james4beach

Jimmy said:


> Sort of an apples to oranges misleading comparison .That mutual fund holds stocks indefinitely. That isn't their investment approach at all in the services. Their portfolios are designed for a 5 year hold and are rotating. Just because you are too afraid to invest on yiour won doesn't mean you have to discredit the success of others.


Jimmy, you're telling me that the brothers have a superior strategy, but decided to use an inferior strategy in their mutual fund?

So the newsletter is better than the mutual fund. I'm being too hard on them because the real magic is in their newsletter, not the mutual fund?


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## MrBlackhill

james4beach said:


> So there you go. The Motley Fool stock picks do about the same as the index but in fact, have a worse risk-adjusted return than the index.


Makes sense because what's missing in this analysis is that managing a fund does not allow taking the same level of risk and strategy than just giving stock picking advices.



james4beach said:


> They could advise a hedge fund or multiple pension funds. With performance like that, they would beat the pants off everyone else and become the most successful [advisor to] a hedge fund. Or they'd become integral parts of the largest pension funds and sovereign wealth funds in the world, being paid many millions of $ in perpetuity. Enormous, ongoing fees for them.
> 
> They could displace the S&P and completely ruin the business model, make the S&P 500 obsolete, with their new and superior methodology. They could steal away all of S&P's indexing business and become kings of the portfolio management world.


Because they aren't blowing anything actually.

Based on the graph of their stock picking performance:

From 2002 to 2013, they averaged 15.75% CAGR vs 13.06% for QQQ
From 2002 to 2016, they averaged 17.88 % CAGR vs 12.78% for QQQ
From 2002 to 2019 , they averaged 19.27% CAGR vs 14.43% for QQQ
From 2002 to 2013, they averaged 20.80% CAGR vs 15.84% for QQQ
Nothing to break the market. Also, at of 2013, would you give it a try picking their stocks or would you simply buy QQQ? I would've just bought QQQ.

But then they've been on a very good run for the past 7 years. But hey, QQQ averaged 22% CAGR during that period.

Why would they bother with all that newsletter? What if they are just passionate about it to make a living from sharing those advice and starting a business and funds and ETFs?

By the way, 20% CAGR doesn't make you filthy rich. Even if you start with $100,000 and then invest another $20,000 every year for those 18 years at 20% CAGR, you end up sitting on "only" $5.7M, which is awesome but not my definition of filthy rich. Starting a business though, *that* can make you filthy rich.


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## MrBlackhill

AltaRed said:


> Market cap weighting is not supposed to be weighted for anything other than the market weight of its constituents (total float outstanding). Why is that so hard to understand?


Exactly, which means they just represent the broad market but they do not represent the optimized performance of the broad market.


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## AltaRed

MrBlackhill said:


> Exactly, which means they just represent the broad market but they do not represent the optimized performance of the broad market.


No, because there is no quantifiable standard measure for optimized performance of the broad market. It is an oxymoron.

Added: You may have a personal opinion on what that might be but that is all it is. An opinion.


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## Jimmy

james4beach said:


> Jimmy, you're telling me that the brothers have a superior strategy, but decided to use an inferior strategy in their mutual fund?
> 
> So the newsletter is better than the mutual fund. I'm being too hard on them because the real magic is in their newsletter, not the mutual fund?


This fund is a passive index for the general public like any tech index. Again the strategy is different for the service . The holding period is different too . If you want the top picks , advice on when to buy and sell you have to subscribe , None of the picks I have are in that index which is also midcaps too.

You saw the services performance vs the S&P already. Sad you just can't accept they do quite well


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## AltaRed

james4beach said:


> Jimmy, you're telling me that the brothers have a superior strategy, but decided to use an inferior strategy in their mutual fund?
> 
> So the newsletter is better than the mutual fund. I'm being too hard on them because the real magic is in their newsletter, not the mutual fund?


James, this is just another fad/trend that has had a run of luck. Remember when the way to riches in the Cdn stock market was to be invested in the super commodity cycle and investors (including many CMF members) were still in it bleeding red ink well into 2015 and 2016? Remember Sir John Templeton's run? Or Peter Lynch's run? MF's run via their newsletter is just another of the same that may last 10 years or 20 years, but will ultimately fail like all others, ultimately seen only in hindsight.

Added: A lot of investors do well with hot trends. The question is knowing when to get off that pony.


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## MrBlackhill

AltaRed said:


> No, because there is no quantifiable standard measure for optimized performance of the broad market. It is an oxymoron.
> 
> Added: You may have a personal opinion on what that might be but that is all it is. An opinion.


There won't ever be a standard for optimized performance because there will always be place for improvment of the algorithms. But there will be indexes which will constantly outperform the classics, which will give them more attention and they will become the preferred choice for index investing.

There's already 4-5 ways to weight an index:

Price weighting
Market cap weighting & float adjusted
Equal weighting
Fundamental weighting
Oops, I wasn't expecting #4... Seems like that's factor indexing... Seems like that's ZGQ. And that #4 splits into many possibilities.

In 30 years from now, when there will be many ETFs tracking some fundamental weighted index based on the broad market and consistently outperforming it, do you believe people will still invest in SPY or QQQ or VTI or VT?

S&P 500 and NASDAQ will obviously continue being indexed the way they are, but ETFs tracking them will become obsolete as some well-proven twists to these indexes will rise and provide better performance.





__





Weighting Methods in Index Construction | CFA Exam Level 1 - AnalystPrep


There is no perfect index weighting method as each one has its own strengths and weaknesses. - Equity | CFA Program Level 1 - AnalystPrep




analystprep.com


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## MrBlackhill

AltaRed said:


> Remember Sir John Templeton's run? Or Peter Lynch's run?


15% CAGR over 38 years?
29% CAGR over 13 years?

I'm in!


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## Jimmy

Well they were astute enough to invest in the early tech companies and have already made gains in the order of 14,000+ % over the past ~ 20 years spotting early disruptive stocks like Netflix and Amazon.

I didn't believe in those companies initially either but there is no denying new connected tv technology and cloud services computing now. They seem to be pretty versed on many of the current and future trends going forward too from the success of their growth recommendations and research reports. The service managers in MF Canada are mainly CFAs w decades of experience in the financial services industry and again the record speaks for itself.


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## Karlhungus

MrBlackhill said:


> 15% CAGR over 38 years?
> 29% CAGR over 13 years?
> 
> I'm in!


Sure, if you got in and out at the exact right time.


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## MrBlackhill

james4beach said:


> They could advise a hedge fund or multiple pension funds. With performance like that, they would beat the pants off everyone else and become the most successful [advisor to] a hedge fund.


I wanted to come back on this because I've just seen a video of Warren Buffett saying that something that adds a big nuance about hedge funds vs small money retail investor.

We know that Buffet made a bet that he won. His bet was that hedge fund managers would do stock-picking and would not be able to beat the index.









Buffett's Bet with the Hedge Funds: And the Winner Is …


In 2008, Warren Buffett placed a million-dollar bet that an S&P 500 index fund would beat the funds of funds hedge fund managers would select.




www.investopedia.com





But then, in a video that I've seen with Buffet, he talks about small money (one million dollars is his definition of small money) and he says there's half a dozen people he knows that could achieve 50% CAGR with one million dollars. But then he says it gets harder when you have $10M, then even harder with $100M and even harder with $1B+. And that's totally logical.

When you have $1M, there's so many small stocks in which you can invest and concentrate, but when you have $1B, you can't do that because those stocks are too small for your money. Either you'd have to buy nearly the whole company or you'd have a liquidity issue.

That's why a hedge fund manager is having a though time beating the index. He has to invest most of his money in stocks that are already big.

Let's take a hedge fund with a NAV of $5B, for instance. In my portfolio, my biggest winner this year is WELL.TO, which I bought when the stock's market cap was $300M. I took a position which was almost 3% of my portfolio. When the portfolio is worth $5B, that 3% would be $150M, which would mean buying half of WELL. Obviously, you can't do that. Also the average volume was about 1M. I bought the stock at $2. If you want to buy $150M of that stock, it would take 75 trading days. But 75 trading days later, the stock had already doubled. And even if you could've bought $150M of WELL, it would've greatly reduced its performance because half of its worth would not traded anymore because you are holding it.

If Buffett says he knows half a dozen people who can achieve 50% CAGR with small money, then there's certainly thousands of people who can achieve 40% CAGR and hundreds of thousands of people who can achieve 30% CAGR.

That's the simple reason why 50% CAGR is not sustainable. $1M at 50% CAGR turns into $10M after only 6 years, which make it harder to maintain. Then say you achieve 40% CAGR with $10M, well 7 years later you are at $100M which make it harder again. Then 9 years at 30% CAGR to turn $100M into $1B. Then 13 years at 20% CAGR to turn $1B into $10B. And so on.

Obviously you can't maintain 50% CAGR throughout your lifetime because 50% CAGR through 50 years would turn $1M into $637B. How would you distribute your portfolio with that much money to still achieve 50%? Impossible.

On another note, Buffet already said that diversification is protection against ignorance, it makes little sense if you know what you're doing.


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## MrBlackhill

Here's another combination, a 10-pack equal weight.

I'm curious how it'll do in the next 15 years. I'll try to remember this thread to document this test...





__





Backtest Portfolio Asset Allocation


Analyze and view backtested portfolio returns, risk characteristics, standard deviation, annual returns and rolling returns



www.portfoliovisualizer.com









__





Backtest Portfolio Asset Allocation


Analyze and view backtested portfolio returns, risk characteristics, standard deviation, annual returns and rolling returns



www.portfoliovisualizer.com


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## GreatLaker

MrBlackhill said:


> When you have $1M, there's so many small stocks in which you can invest and concentrate, but when you have $1B, you can't do that because those stocks are too small for your money. Either you'd have to buy nearly the whole company or you'd have a liquidity issue.
> 
> *That's why a hedge fund manager is having a though time beating the index. He has to invest most of his money in stocks that are already big.*



Warren Buffett's premise for that hedge fund bet was that the cost of active management made it unlikely to beat a simple low-cost index. He stated it a couple of times in Berkshire's letters to shareholders. 

Berkshire 2016 Letter to Shareholders


> Now, to my bet and its history. In Berkshire’s 2005 annual report, I argued that active investment management by professionals – in aggregate – would over a period of years underperform the returns achieved by rank amateurs who simply sat still. *I explained that the massive fees levied by a variety of “helpers” would leave their clients – again in aggregate – worse off than if the amateurs simply invested in an unmanaged low-cost index fund *


Berkshire 2017 Letter to Shareholders 


> I made the bet for two reasons: (1) to leverage my outlay of $318,250 into a disproportionately larger sum that – if things turned out as I expected – would be distributed in early 2018 to Girls Inc. of Omaha; and* (2) to publicize my conviction that my pick – a virtually cost-free investment in an unmanaged S&P 500 index fund – would, over time, deliver better results than those achieved by most investment professionals*, however well-regarded and incentivized those “helpers” may be. Addressing this question is of enormous importance. *American investors pay staggering sums annually to advisors, often incurring several layers of consequential costs. In the aggregate, do these investors get their money’s worth? Indeed, again in the aggregate, do investors get anything for their outlays?*


Certainly it gets harder to manage a very large fund, especially as its holdings would be a large portion of outstanding shares of a company it holds. That's why funds like Mawer New Canada have been closed to new investors and even to new purchases by existing investors for years.

The costs of managing a mutual fund or hedge fund are not something that an individual investor bears. It may be easier for a skilled individual investor to beat an index without those costs.

But the stated premise of Buffett's bet was that costs, not size, make it hard for actively managed funds to consistently beat an index over a decade.


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## MrBlackhill

GreatLaker said:


> Warren Buffett's premise for that hedge fund bet was that the cost of active management made it unlikely to beat a simple low-cost index. He stated it a couple of times in Berkshire's letters to shareholders.
> 
> Berkshire 2016 Letter to Shareholders
> 
> 
> Berkshire 2017 Letter to Shareholders
> 
> 
> Certainly it gets harder to manage a very large fund, especially as its holdings would be a large portion of outstanding shares of a company it holds. That's why funds like Mawer New Canada have been closed to new investors and even to new purchases by existing investors for years.
> 
> The costs of managing a mutual fund or hedge fund are not something that an individual investor bears. It may be easier for a skilled individual investor to beat an index without those costs.
> 
> But the stated premise of Buffett's bet was that costs, not size, make it hard for actively managed funds to consistently beat an index over a decade.


Thanks, makes sense.

I said that also because I saw a video where Buffet said he knows a handful of people who can do 50% CAGR with small money (one million) and that performance gets harder to achieve as the amount of money managed increases. Unfortunately, I don't recall where was that video.


----------



## GreatLaker

MrBlackhill said:


> Thanks, makes sense.
> 
> I said that also because I saw a video where Buffet said he knows a handful of people who can do 50% CAGR with small money (one million) and that performance gets harder to achieve as the amount of money managed increases. Unfortunately, I don't recall where was that video.


I don't remember seeing that video, but I may have read something like that in one of Berkshire's annual letters to shareholders.

But unless Buffett names names, and provides their annual returns it didn't happen.


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## MrBlackhill

Here's another portfolio I'll want to follow and study.

This one is not for the risk-averse as it has only 5 stocks. Canadian equities, this time.

Pretty crazy to witness the power of uncorrelated equities and even to compare them to a conservative asset class allocation.






Backtest Portfolio Asset Allocation


Analyze and view backtested portfolio returns, risk characteristics, standard deviation, annual returns and rolling returns



www.portfoliovisualizer.com





Alternatives




__





Backtest Portfolio Asset Allocation


Analyze and view backtested portfolio returns, risk characteristics, standard deviation, annual returns and rolling returns



www.portfoliovisualizer.com


----------



## james4beach

MrBlackhill said:


> Pretty crazy to witness the power of uncorrelated equities and even to compare them to a conservative asset class allocation.


Neat result for sure, but beware that this is mostly a hindsight game.

I plead guilty to playing the same game with my own 5-pack though. It also has the hindsight bias problem... whether it will continue working like that going forward is an open question.


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