# Market out performance, Luck or Skill?



## Pluto (Sep 12, 2013)

This question arises from time to time in diverse threads, where eventually the discussion gets lost in the passage of time, and under titles of threads that have little to do with the subject. So hopefully we can gather our thoughts and views on the subject in a thread intended for it, and refer back to it when desired in lieu of getting too far a afield in a thread that was never intended for this subject. 

I am clearly on the side that it is skill. Guys like Templeton, Lynch, Buffett, Munger, and others outperformed over many years, and the dismissal of their performance as luck is an easy, shallow and ultimately dissatisfying critique. 


The luck theory proposes that Price = Value. That strikes right at the heart of the value approach. According to the luck theory, there is never a time where a stock is a bargain, and there is never anytime, where a stock is over priced. What does this tell investors to do? It tells them, buy anything at any price. And if, based on this theory, one bought just before a bear market, and your portfolio declined 30, 40% or more, what is this theories explanation for your losses? You were unlucky. And if you foolishly waited until stocks presented what you foolishly thought was good value, and your stocks went up, What does the luck theory tell you is the explanation? It tells you you were lucky. Can that really be true?


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## Fraser19 (Aug 23, 2013)

Pluto said:


> This question arises from time to time in diverse threads, where eventually the discussion gets lost in the passage of time, and under titles of threads that have little to do with the subject. So hopefully we can gather our thoughts and views on the subject in a thread intended for it, and refer back to it when desired in lieu of getting too far a afield in a thread that was never intended for this subject.
> 
> I am clearly on the side that it is skill. Guys like Templeton, Lynch, Buffett, Munger, and others outperformed over many years, and the dismissal of their performance as luck is an easy, shallow and ultimately dissatisfying critique.
> 
> ...


To me it seems that both are a part of the equation. To me it seems that not making foolish decisions has a lot to do with it. I have found that the more I work on my skills of self restraint reflects in my portfolio. When I see something drop, I want to buy it up quickly. However if I did this all the time I would not be in a very good situation right now. 

I do not have much to say about how they make there decisions about what to buy and what not to buy as they are clearly on a different level than I am.


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## cainvest (May 1, 2013)

Pluto said:


> I am clearly on the side that it is skill. Guys like Templeton, Lynch, Buffett, Munger, and others outperformed over many years, and the dismissal of their performance as luck is an easy, shallow and ultimately dissatisfying critique.


I would like to see these outperformance values for those mentioned above, of course this would be only for the investments that us average DIY investors have access too.

I would tend to think skill plays a part in investing, more so in stopping oneself from making costly mistakes than trying to beat the market. A example of this would be to buy an equivalent low MER ETF over a much higher MER mutual fund, not out to beat the market, just to get a small percentage more in your pocket instead of theirs.


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## BoringInvestor (Sep 12, 2013)

Pluto said:


> This question arises from time to time in diverse threads, where eventually the discussion gets lost in the passage of time, and under titles of threads that have little to do with the subject. So hopefully we can gather our thoughts and views on the subject in a thread intended for it, and refer back to it when desired in lieu of getting too far a afield in a thread that was never intended for this subject.
> 
> I am clearly on the side that it is skill. Guys like Templeton, Lynch, Buffett, Munger, and others outperformed over many years, and the dismissal of their performance as luck is an easy, shallow and ultimately dissatisfying critique.
> 
> ...


What is Buffet's and others long term performance?


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## Just a Guy (Mar 27, 2012)

I don't really understand the obsession with buffet. He's not a normal investor, he has access to deals that most qualified investors, let alone an average investor can access. In 2008 the government basically approached him to invest in the failing banks and basically guaranteed his purchase even with the substantial discount he'd be buying in at (well below "market" values). 

People like him make money differently than others...the same as I make money differently from people with a job. You can't really compare the two, that's why we use the word "differently". Buying stocks and being a trader on Wall Street aren't the same, read Lewis's Flash boys. 

None of us will ever be buffet.

The way the market works, luck will almost always play some role in our results...no matter how good our research or system, because the market is manipulated on a short term basis..,it's part of the design.


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## lonewolf (Jun 12, 2012)

Market out performance is from being independent


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## OptsyEagle (Nov 29, 2009)

Pluto said:


> I am clearly on the side that it is skill. Guys like Templeton, Lynch, Buffett, Munger, and others outperformed over many years, and the dismissal of their performance as luck is an easy, shallow and ultimately dissatisfying critique.


Not the best way to ask for objective opinions, but let's not go there.

Although the individuals you listed have had very impressive results, we will never be able to prove whether their results are from skill or just luck. Statisticians say it would take about 100 years or more of outperformance to prove statistically that it was from skill alone. Since no one is going to manage money that long, this becomes a non provable issue.

So I have to use my own intuition to answer this for myself, as does everyone else. What you didn't list were the multi-millions of other investors that DO NOT have such impressive records, who have the same education, years of experience, access to research, followed the same investment guidelines, etc., etc. So I ask myself, if millions of people are trying to beat the stock market and only a handful can be found to have done so, is it possible that the ones found were just lucky and the others were just unlucky. Can it be possible that the long term outperformance, of the individuals above, be the result of just good luck. Statistics says YES IT CAN. Again, if we put a million people in a room and ask them call the flip of a coin and when they are wrong they leave the room and when they are right they keep flipping, probabilities say that more then one of those coin flippers will be still flipping after 20 coin flips. Now we all should know that the next flip is completely random, but if you had just called the coin flip correctly 20 times in a row, you are going to start to believe that it is NOT luck. That you somehow have a knack for this. Even the press are going to call you a GURU and all your friends are going to start to place bets on what your call is for the next coin flip. There will be a lot of excitement generated here, but at the end of the day, you have a 50:50 chance of getting the next flip right.

So, in summary, I believe they were lucky. They are all very smart guys, but all smarts do for you, in investing, is keep you from doing really dumb things. Education and experience will simply even the playing field since the majority of money, managed on Wall Street, is done by very highly educated and experienced people. There is not a high school drop out in the bunch. What none of them can do is know for sure what the other investors are doing and/or going to do tomorrow. None of them know, what good or bad things are going to happen to the companies they own, next year. Lastly, none of their techniques are a secret, but it seems like no one can replicate the results, in the same way. 

My explanation of that. Perhaps they are just not as lucky.

Anyway, that is my opinion.


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## Rusty O'Toole (Feb 1, 2012)

You can't discount luck or skill. But the more skillful you get, the luckier you get.

I have had to revise my whole way of thinking since I got interested in investing. Investing is counter intuitive, meaning the opposite of common sense. Everybody knows how to make money investing, and what they know is wrong. Learning how to do it even half way right, means learning a lot of new things and even more important, forgetting a lot of old things.

Buffett may not be a value investor but he was for the first 20 years. He recommends this approach because it works, it worked for him and it has worked for a lot of other people.

If it suits your personality it is an excellent, safe, and profitable way to invest. 

Personally I find it boring. I can't stand the math and I can't stand all the minute details even though I am sure math and details are the secret to successful investing.


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## Rusty O'Toole (Feb 1, 2012)

Buffett is not the only value investor. He is not even the only famous value investor.

He learned from Benjamin Graham who spent a lifetime studying markets, stocks, and investing. He finally settled on value investing as the best and safest method, and made a fortune.

Sir John Templeton's motto was "get 'em while they are cold". He made his fortune buying cheap out of favor stocks and waiting for the public to smarten up. The way he knew which ones to buy, was by analyzing their financial statements.

Peter Lynch was a great one for hunting out small overlooked companies with good balance sheets that did a good business with growing profits. He really got excited when he called up some company and they said "you are the first security analyst who ever called us".


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## Rusty O'Toole (Feb 1, 2012)

I don't agree that investment companies have any edge over the individual investor. The record proves they don't, and their books and interviews cast doubt on their genius.

Besides, they are in business to maximize their own profits, not the profits of their clients. Their big goal is "AUM" or assets under management. They get a certain percentage and the more AUM the more they make. Investors being what they are, a flashy front means more than real performance when it comes to attracting clients and their money. It is important for them to follow the crowd even when the crowd is running over a cliff.


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## Causalien (Apr 4, 2009)

So I am curious, when I comment on something related to investment. Do people on this forum discard it as heresay or a joke? Or do you take it seriously?


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## Just a Guy (Mar 27, 2012)

Rusty O'Toole said:


> I don't agree that investment companies have any edge over the individual investor. The record proves they don't, and their books and interviews cast doubt on their genius.


True, but they don't just make money from stocks. As you state, they make money off of other people's money even if they lose money.

They also control some of the trades, it's been documented (and some companies fined) that they have sold stocks owned by the company at higher prices than the market. If they do an ipo, they have access to stock before the market opens, they can manipulate the market with large trades (look for the Cramer video where he outlines stock manipulation using apple as an example)...this is just a few advantages they have over the individual investor...

Of course, the individual can fly under the radar, but that's about their only advantage.


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## jcgd (Oct 30, 2011)

I think it is the high liquidity that makes stock investing so different from other forms. I think there are so many inputs that they end up being very unpredictable over the short to medium term. And even if you'd be right in the long term, things can change unexpectedly before they long term materializes. 

People don't only buy stocks to make money. They buy and sell to make commissions, they buy and sell to manipulate the price, they sell short, they cover positions, stock is sold to raise equity, stock is bought back, etc. 

If you are able to invest in a company privately and they increase their book value year after year steadily the value of your interest will increase. Do the same thing with common stock and a million outside forces can affect the value of your shares. Too much emotion and what have you involved. 

If you had to hold a stock for five years the whole game would be completely different.


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## Rusty O'Toole (Feb 1, 2012)

Just a Guy said:


> True, but they don't just make money from stocks. As you state, they make money off of other people's money even if they lose money.
> 
> They also control some of the trades, it's been documented (and some companies fined) that they have sold stocks owned by the company at higher prices than the market. If they do an ipo, they have access to stock before the market opens, they can manipulate the market with large trades (look for the Cramer video where he outlines stock manipulation using apple as an example)...this is just a few advantages they have over the individual investor...
> 
> Of course, the individual can fly under the radar, but that's about their only advantage.


In those cases they are stealing from their customers, not for their customers.

An individual investor has several advantages over an institution. He is not bound by any regulations that govern investing for others. He does not have a boss to answer to. He is free to go against the main stream if he wishes. And he can take advantage of opportunities that are too small for a billion dollar company to even look at.

Warren Buffet has remarked that if he were managing a million dollars, he could easily make 50% a year but this is impossible when you handle a multi billion dollar company.

"I killed the Dow" is what he says about his early investing years in the fifties. In those days he was handling smaller amounts (he started with $160,000) and had a lot more flexibility.


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## Rusty O'Toole (Feb 1, 2012)

BoringInvestor said:


> What is Buffet's and others long term performance?


The top portfolio managers like Peter Lynch and Sir John Templeton average 10% - 12% over 20 years or more. Buffett's average is about 22% over 50 or 60 years but he has the advantage of using leverage from the insurance companies he controls.

If you can beat the Dow or S&P by 2% consistently year after year, and never have a drawdown over 15% you can go in the record books.


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## Eclectic12 (Oct 20, 2010)

cainvest said:


> I would like to see these outperformance values for those mentioned above, of course this would be only for the investments that us average DIY investors have access too.


During the thirteen years Lynch ran the Magellan fund, reportedly his average return was 29% - where the S&P500 index was beaten eleven of thirteen years.

As for trying to compare with what a DIY investor has access to ... I suspect it's an apples to oranges comparison. The fund manager has to invest what he has been given, likely has a large economy of scale, is working on it full time as well as lots of help - to name a few factors. The DIY investor can be a lot more flexible.


Cheers


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## Eclectic12 (Oct 20, 2010)

OptsyEagle said:


> ... What you didn't list were the multi-millions of other investors that DO NOT have such impressive records, who have the same education, years of experience, access to research, followed the same investment guidelines, etc., etc.


Putting aside the investment record for a moment - I suspect that by definition - there can't be multi-millions with so many criteria that is the *same*. Just education, access to research and availability of time is likely to rule out most CMF-ers, where there are supposed to be many more who *aren't interested* in investing. Then consider that there's all sorts of investment guidelines to narrow the pool under consideration and I think the possible people is far fewer.




OptsyEagle said:


> ... if millions of people are trying to beat the stock market and only a handful can be found to have done so ...


Are millions trying to beat the index ... or are they trying to make money?
As I understand the philosophy of ETFs ... those choosing this route are trying to get maximum return at lowest cost and have given up on beating the index so that they won't be at either extreme.


Cheers


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## OptsyEagle (Nov 29, 2009)

Eclectic12 said:


> Are millions trying to beat the index ... or are they trying to make money?


They are trying to make as much money as possible, which by definition means they probably want to beat everything and everyone. I agree there are a few million of other people that just want to beat a GIC rate or never gave it any thought at all, but with 7 Billion people in the world, all wanting to be richer, I am pretty sure at least a million are trying to knock the lights out on stock investing performance.

Anyway, the reality is that everyone's performance is going result from some degree of BOTH skill and good luck. Without both, the investor is doomed. It is my opinion, however, that when we are looking at the best performing individuals, good luck played a dominant role in their results.

Warren Buffet is a very skilled individual and with the addition of some incredibly good luck, he became one, if not the best investor of our time. That other guy, I don't remember his name, who had incredible skill as well, but was followed around with bad luck every time he made a trade, did not. What was his name. Hmmm, funny how those guys names never seem to get mentioned and hence we never seem to get to hear their stories.


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## Pluto (Sep 12, 2013)

OptsyEagle said:


> Not the best way to ask for objective opinions, but let's not go there.
> 
> Although the individuals you listed have had very impressive results, we will never be able to prove whether their results are from skill or just luck. Statisticians say it would take about 100 years or more of outperformance to prove statistically that it was from skill alone. Since no one is going to manage money that long, this becomes a non provable issue.
> 
> ...


You claim that statisticians, whom you trust, say it is an unprovable issue. Yet you still conclude they are just lucky. So what I am curious about it how you get to your conclusion. 

One of your assumptions on the way to you conclusion is that I or people in general would be wrong about the odds of a coin toss after someone guessed correctly 20 x's in a row. You assume that I and others would start to think it wasn't luck, ant this individual was a guru. Why do you make that assumption? Then you seem to assume, that since some people would think the 21st toss guess was not luck, above average investors must be lucky. But I don't get it, because you are already assuming they are lucky, and you already state it can't be proven they are lucky. 

what you state about investing could be said about any profession. All professions have above average performers and average performers. Isn't it possible its just luck in any profession? What if we used Just a Guy's business as an example: -

For instance, what if over time he bought and rented 20 doors, and he made money on all of them. Then you asked people what are the odds he would make money on the 21st door? Suppose someone said 100%, and someone else said 1 out of 21. and someone else said 90%, and so on. What does what they say have to do with the odds of his success? Why does it matter what they think? If business success isn't just pure luck, why does buying a share in a business have to be pure luck? 

Also you assume they all have the same education, but I think not. Your theory, the efficient market hypothesis, was not devised or even taught prior to the 1970's. And you don't address any critique of the theory. for instance, 

http://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-and-Doddsville

Dismissing the good performers as lucky, while admitting you can't prove they are lucky, is dissatisfying to me.


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## Pluto (Sep 12, 2013)

BoringInvestor said:


> What is Buffet's and others long term performance?


Well I think Buffett's is around 20% with BRK. Templeton was around 20% with his Templeton Growth fund. Lynch was around 30% for his career. There were others as well. 

The underlying issue is the efficient market hypothesis claims they were just lucky, while others claim it was skill based. 

Interestingly, after Temeplton retired and sold his famous Growth fund, performance dropped. Recently I think it is about 10%, whereas when he was running it it averaged around 20. that indicates to me his performance was skill. But the efficient market hypotheses folks would simply say he was lucky, and when the new guys took over, they were not as lucky. Their explanations of performance differences seems shallow and dissatisfying.


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## OptsyEagle (Nov 29, 2009)

Pluto said:


> You claim that statisticians, whom you trust, say it is an unprovable issue. Yet you still conclude they are just lucky. So what I am curious about it how you get to your conclusion.
> 
> 
> Dismissing the good performers as lucky, while admitting you can't prove they are lucky, is dissatisfying to me.


I am pretty sure I explained how I came to my conclusions. Since it is not proveable, it is simply my opinion, whether you can understand it or not.

As for that, I didn't say that I cannot prove whether luck or skill is involved, I said NO ONE can prove whether luck or skill is involved. Again, my opinion is that it is a combination of both, but for the outliers (the ones with the absolute best and worst returns) luck is the dominant factor ... again, all my opinion since no one can prove this.

The coin flip analogy was included to help explain the human behaviour around why we seem to always think that because one has had a better track record then someone else that it must be due to skill as opposed to luck...and trust me, if you called the flip of a coin, 20 times in a row, I doubt you are going to still be assuming it was all luck ... unless you are that exceptional human being without the human frailties that the rest of us usually have.

Anyway, those are my thoughts.


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## Woz (Sep 5, 2013)

There’s an interesting paper that looks at Buffett’s performance: http://www.econ.yale.edu/~af227/pdf/Buffett's Alpha - Frazzini, Kabiller and Pedersen.pdf

The author’s conclusion was that Buffett’s returns are the result of the use of leverage and a tilt towards Betting-Against-Beta and Quality-Minus-Junk factors. I wasn’t entirely convinced of the conclusion because it seemed to be based on data mined factors that aren’t widely used, but there is a lot of good discussion about his returns.

Particularly,

“Berkshire has had a number of down years and drawdown periods. For example, from June 30, 1998 to February 29, 2000, Berkshire lost 44% of its market value while the overall stock market gained 32%. While many fund managers might have had trouble surviving such a shortfall of 76%, Buffett’s impeccable reputation and unique structure as a corporation allowed him to stay the course and rebound as the internet bubble burst.”

It’s a good reminder that one of Buffett’s positive traits is being patient enough to ride out rough periods.


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## Pluto (Sep 12, 2013)

Just a Guy said:


> I don't really understand the obsession with buffet. He's not a normal investor, he has access to deals that most qualified investors, let alone an average investor can access. In 2008 the government basically approached him to invest in the failing banks and basically guaranteed his purchase even with the substantial discount he'd be buying in at (well below "market" values).
> 
> People like him make money differently than others...the same as I make money differently from people with a job. You can't really compare the two, that's why we use the word "differently". Buying stocks and being a trader on Wall Street aren't the same, read Lewis's Flash boys.
> 
> ...


Of course there is always risk, and risk is a close relative to luck. But let my try and put it in terms you can relate to. 
You operate a business by buying places and renting them out. Supposing an investor came along and offered you capital to expand your business, and in return he became a passive investor/part owner. You considered the idea and asked how much of a share of ownership would you want? 
At that point you two would be discussing Value. What does he get for his money? would he get a fair share, a poor share, or a bargain? 
the efficient market approach (the luck theory) says Price = Value. So what ever he is willing to pay for for what ever you are willing to offer is the value of his share. Price and value are always the same. In this view, he can never over pay or under pay for his share. 
But the Value approach says Price is what you pay, and value is what you get and they are not always the same. so if he paid a high price for his share, and his return was low, the efficient market hypothesis would just say he was unlucky. And if he convinced you to give him a share size where he got a high rate of return, they would say he was just lucky. According to them, nothing in this transaction has anything to do with skill. 

Now when people on this forum say they are considering a real estate business, you tell them to do the math and figure out what he would get in relation to what he is paying. How much income would they get in relation to how much they have to pay for the income producing asset? Its just common sense to you. You are a value investor. You are already similar to Buffett. 

In contrast the efficient market hypothesis claims that the value of a property is its market price. And if the rent - what the asset produces - is low compared to what one paid for the asset, it doesn't matter, value is always = the market price. Their theory proposes that one can buy and rent a property anytime at the market price and they always get value. I think you recognize the flaw in that hypothesis. 

Now I realize there are biased articles out there that claim none of us can be like Buffett. But you already are similar. the essence of his approach is exactly the same as how you figure out if a particular property is viable. I'm not concerned about you doing anything foolish in the stock market because I think you already apply the same value approach there as you do in your real estate business.


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## Pluto (Sep 12, 2013)

this is in reply to OptsyEagle's p/e theory from another thread: To quote OptsyEagle,

"However, since you brought it up, I would say that buying TD bank at $50 when it's PE is at 13 is a much better deal then paying $60 for the same stock on the same day just because it's PE is now calculated at 7. I would say all that happened there was the person paid $10 more per share. I hope they enjoy their PE." 

OK OptsyEagle, in one case you are paying 13 for one dollar of earnings. In the other case you are paying 7 for 1 dollar of earnings for the same bank. why is paying more for each dollar of earnings a better deal? 

supposing it wasn't a bank. Supposing it was a rental property. And the seller said you can have this property for 13 times the annual rent, or you can have it for 7 times the annual rent, and you picked 13 times. Why is that better?


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## OptsyEagle (Nov 29, 2009)

Pluto said:


> this is in reply to OptsyEagle's p/e theory from another thread: To quote OptsyEagle,
> 
> "However, since you brought it up, I would say that buying TD bank at $50 when it's PE is at 13 is a much better deal then paying $60 for the same stock on the same day just because it's PE is now calculated at 7. I would say all that happened there was the person paid $10 more per share. I hope they enjoy their PE."
> 
> OK OptsyEagle, in one case you are paying 13 for one dollar of earnings. In the other case you are paying 7 for 1 dollar of earnings for the same bank. why is paying more for each dollar of earnings a better deal?


Because in my actual example it was cheaper. The last time I looked paying $50 for a share of a bank was cheaper then paying $60 for that bank, and that was my example you are referring to. 

Of course we all want to pay the lowest price for our shares, but in your post you are assuming that earnings are fixed and therefore a lower PE would mean a lower price for the shares. If earnings were fixed, that would be true, but future earnings can change and will, as you probably know. So there will be many times in your investing future where getting a stock at a perceived low PE is simply a value trap where you just bought a company whose problems are about to surface. Other times it will turn out to be a good deal. Therefore, a low PE can sometimes mean a good deal and sometimes it means a bad deal, therefore in almost all cases it means very little. Since PE cannot give you enough information, if you trade on them and the trade works out well, you just had yourself some very good luck and if it turns out badly, the luck was not so good.

That is pretty much what I meant.


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## Pluto (Sep 12, 2013)

Rusty O'Toole said:


> You can't discount luck or skill. But the more skillful you get, the luckier you get.
> 
> I have had to revise my whole way of thinking since I got interested in investing. Investing is counter intuitive, meaning the opposite of common sense. Everybody knows how to make money investing, and what they know is wrong. Learning how to do it even half way right, means learning a lot of new things and even more important, forgetting a lot of old things.
> 
> ...


Thanks for your vote for skill. 
I'm not sure that they do much math. I recall Buffet claiming the only figuring they did was a little arithmetic on a napkin over lunch.


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## Pluto (Sep 12, 2013)

Rusty O'Toole said:


> I don't agree that investment companies have any edge over the individual investor. The record proves they don't, and their books and interviews cast doubt on their genius.
> 
> Besides, they are in business to maximize their own profits, not the profits of their clients. Their big goal is "AUM" or assets under management. They get a certain percentage and the more AUM the more they make. Investors being what they are, a flashy front means more than real performance when it comes to attracting clients and their money. It is important for them to follow the crowd even when the crowd is running over a cliff.


Thank you, thank you. These are true words.


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## Pluto (Sep 12, 2013)

Just a Guy said:


> True, but they don't just make money from stocks. As you state, they make money off of other people's money even if they lose money.
> 
> They also control some of the trades, it's been documented (and some companies fined) that they have sold stocks owned by the company at higher prices than the market. If they do an ipo, they have access to stock before the market opens, they can manipulate the market with large trades (look for the Cramer video where he outlines stock manipulation using apple as an example)...this is just a few advantages they have over the individual investor...
> 
> Of course, the individual can fly under the radar, but that's about their only advantage.


Individuals have a great advantage but only if they know what the advantages are. 

I don't understand the fascination with cases of manipulation and fraud. It happens, but it doesn't have to determine the outcome for an individual investor. Supposing I was to say there is manipulation and fraud in Real estate investing, and so your real estate investing success must be luck, what would you say?


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## Pluto (Sep 12, 2013)

Rusty O'Toole said:


> The top portfolio managers like Peter Lynch and Sir John Templeton average 10% - 12% over 20 years or more. Buffett's average is about 22% over 50 or 60 years but he has the advantage of using leverage from the insurance companies he controls.
> 
> If you can beat the Dow or S&P by 2% consistently year after year, and never have a draw down over 15% you can go in the record books.


Well, I'm pretty sure Lynch averaged 29% during the time he managed the Magellan fund. 

http://en.wikipedia.org/wiki/Magellan_Fund

Templeton was widely recognized for a 20% annual gain over decades, however, apparently around the time he sold his funds it was 14.5.


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## Pluto (Sep 12, 2013)

OptsyEagle said:


> ...and trust me, if you called the flip of a coin, 20 times in a row, I doubt you are going to still be assuming it was all luck ... unless you are that exceptional human being without the human frailties that the rest of us usually have.
> 
> Anyway, those are my thoughts.


Well you are plain wrong. On the 21st toss, and all tosses, I would have said the chances are 50/50. But since you didn't ask me, before you drew your conclusion, its obvious you are not interested in facts. 

Who are the statisticians who have proved these things to you? Any references so we can read them and assess for our selves?


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## OptsyEagle (Nov 29, 2009)

Pluto, I am pretty sure the readers on this board are getting pretty tired of my responses to your responses to my responses. I know I am. Let's just agree we see things completely differently.


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## Just a Guy (Mar 27, 2012)

Pluto said:


> Individuals have a great advantage but only if they know what the advantages are.
> 
> I don't understand the fascination with cases of manipulation and fraud. It happens, but it doesn't have to determine the outcome for an individual investor. Supposing I was to say there is manipulation and fraud in Real estate investing, and so your real estate investing success must be luck, what would you say?


Real estate is not a universal market, it's a market of individual products. Corruption in one doesn't affect the whole, as opposed to this...

http://youtu.be/W90V_DyPJTs

Stuff like this was why I'm a buy and hold stock investor.


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## Just a Guy (Mar 27, 2012)

Pluto said:


> Now when people on this forum say they are considering a real estate business, you tell them to do the math and figure out what he would get in relation to what he is paying. How much income would they get in relation to how much they have to pay for the income producing asset? Its just common sense to you. You are a value investor. You are already similar to Buffett.
> 
> Now I realize there are biased articles out there that claim none of us can be like Buffett. But you already are similar. the essence of his approach is exactly the same as how you figure out if a particular property is viable. I'm not concerned about you doing anything foolish in the stock market because I think you already apply the same value approach there as you do in your real estate business.


First off, if someone wanted to give me capital to expand my business in real estate, I probably wouldn't give them equity as the business of real estate is based on leveraged money. Why give them equity, if I can finance the property? I may give them a return close to mortgage rates but, as long as I can borrow money, it makes no sense to give equity on top of that, so your analogy doesn't work well.

Next, while it's true I am a value investor as far as the purchase of properties goes, and that it's a calculated return, the luck factor also comes into play with the capital appreciation of my assets. To me, I don't even factor that into any of my equations as its all luck in my opinion. True, I feel I buy below market, but if interest rates rise (something I feel is quite likely) I may still suffer capital losses...as I use other people's money however, I don't lose much sleep over it. However, if something happens to the cities where I own properties and the economy tanks and rents fall, I could be in big trouble, so I still rely on luck there too.

As for me being similar to Buffett, I don't really agree. I admit I'm different than the "average" investor in that I get a chance to invest in deals other people don't. I also know how to use leverage better than others. If we switch to my stock purchases, I also probably buy good companies at excellent prices because the market is tanking...but, I don't have the ability to buy like Buffett, the U.S. government, or the bank doesn't call me up and offer a deal at special rates...nor do these people lend me billions of dollars to purchase companies. I'll grant you I do as much as possible to mitigate risk, probably just as Buffett does, but I can't guarantee my returns either.

While my initial purchases were well thought out (in my opinion) I never rally expected to get the returns I've managed. I remember "experts" telling me that some of my purchases were foolish, but they did very well...does that make me a genius, or just lucky...I can't say. I remember thinking I'd sell some of my first purchases if the stock ever doubled in value, but I didn't check the value very often and later found that I'd more than doubled in value, so I just kept holding it and it continues to do well...is that skill or laziness?

I'm pretty sure I'm not maximizing my profits by any means, but I'd bet I'm beating the market...where my initial picks were good, the return I'm getting has a lot to do with luck. 

Each real estate deal I do actually gets harder to borrow money for, despite my track record, or my cash flow. For me the bank's look only at my tax returns to see my income...I have to fight with them each time.

As I said before, Buffett makes money differently than I do, just like I make money differently than the "average" investor.just because we're both different, doesn't make us the same...even if we share similar philosophies. He works at a different scale and has advantages because of that.


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## GoldStone (Mar 6, 2011)

Hi Pluto,

Have you read Michael Mauboussin's book? I heard it's fantastic. It's on my future reading list.

The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing

He wrote this paper before he published the book:

Untangling Skill and Luck. How to Think About Outcomes - Past, Present, and Future

I'm guessing the book is based on the paper, but goes into more detail.

Cheers.


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## My Own Advisor (Sep 24, 2012)

I'm going to ask for the Success Equation for Christmas


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## Eclectic12 (Oct 20, 2010)

OptsyEagle said:


> They are trying to make as much money as possible, which by definition means they probably want to beat everything and everyone.


Looking at how many around me making good money who are either paying 2-5% for MFs or handing off to an advisor and then adding in all the threads posted here on CMF indicating that lots don't want to ask/learn ... including finding out what their pension might pay ... I have doubts as to how many are active.



OptsyEagle said:


> ... with 7 Billion people in the world, all wanting to be richer, I am pretty sure at least a million are trying to knock the lights out on stock investing performance.


Maybe ... but without some data ... it's hard to reconcile the claimed "3 billion making less than $730 USD a day" plus the lack of interest indicated above to the idea that a lot are trying to knock the lights out.




OptsyEagle said:


> Anyway, the reality is that everyone's performance is going result from some degree of BOTH skill and good luck. Without both, the investor is doomed.


Yet the whole ETF indexing method is based on being invested in the index at the lowest cost is going to beat both skill & luck.


Cheers


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## OptsyEagle (Nov 29, 2009)

Eclectic12 said:


> Looking at how many around me making good money who are either paying 2-5% for MFs or handing off to an advisor and then adding in all the threads posted here on CMF indicating that lots don't want to ask/learn ... including finding out what their pension might pay ... I have doubts as to how many are active.


That is correct, but let us not forget that the people managing their money, the mutual fund managers, ARE active investors, for the most part, and I am pretty sure they are trying to knock the lights out in performance.

The claim about 7 billion people in the world was to give credibility to my guess that at least 1 million people (0.014% of the population) are hoping to make as much money as they can in the stock market. I surely have no link for that, but lets be reasonable. I am sure my guess is probably low by a very large magnitude, but in any case, my point is still valid, whatever the number is. Let's just say "a lot" of investors are trying to knock the lights out in performance, and leave it at that.


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## Pluto (Sep 12, 2013)

Just a Guy said:


> Next, while it's true I am a value investor as far as the purchase of properties goes, and that it's a calculated return, the luck factor also comes into play with the capital appreciation of my assets. To me, I don't even factor that into any of my equations as its all luck in my opinion. True, I feel I buy below market, but if interest rates rise (something I feel is quite likely) I may still suffer capital losses...as I use other people's money however, I don't lose much sleep over it. However, if something happens to the cities where I own properties and the economy tanks and rents fall, I could be in big trouble, so I still rely on luck there too.
> 
> As for me being similar to Buffett, I don't really agree. I admit I'm different than the "average" investor in that I get a chance to invest in deals other people don't. I also know how to use leverage better than others. If we switch to my stock purchases, I also probably buy good companies at excellent prices because the market is tanking...but, I don't have the ability to buy like Buffett, the U.S. government, or the bank doesn't call me up and offer a deal at special rates...nor do these people lend me billions of dollars to purchase companies. I'll grant you I do as much as possible to mitigate risk, probably just as Buffett does, but I can't guarantee my returns either.
> 
> ...


What I take from your post is your business success is not pure 100% luck. I agree. 

I think you misunderstand the original question, which is probably my fault due to the way I posed it. 
there is a theory about stocks which says in part, that the Market Price always = Value. the implicit advice that flows from that is buy stocks at any price because you always get value. 
There is another theory which says Price is what you pay, value is what you get, and they are not always the same. The implicit advice here is look for undervalued stocks. 
Its obvious to me, by the way you write about your business, you take the latter approach, and not the former. For instance, when you consider a property to purchase you don't buy if you know you can't get enough rent to make it worth while. You don't think any market price is good value. 
I think you are making the value approach to stocks way more complicated than it really is. All the value stock investors do is essentially what you already do in your business. 
As far as capital appreciation goes, the value guys like Buffett do not know what it (appreciation) will be with precision in advance either. They know and clearly state that there is a range of possibilities. Same thing with you and your business. What you do is your best to ensure that the worst possible out come will not be so bad as to lose you money. That's what they do. 
When you say your are not similar to them, you are being modest. The differences are peripheral.


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## Pluto (Sep 12, 2013)

GoldStone said:


> Hi Pluto,
> 
> Have you read Michael Mauboussin's book? I heard it's fantastic. It's on my future reading list.
> 
> ...


No I haven't read it but I won't discourage any one else from reading it. I figure most human endeavors are a mixture of skill and luck. There are always knowns and unknowns. For me the key was to learn use the knowns in a way to increase the odds of a positive outcome. "Learn to" implies enhancing my skills. That worked for me in life as well as stocks. In stocks, I improved my chances by analyzing what I did just before a stock failure. If the stock failure was pure bad luck, I didn't change my approach. If the stock failure was due to my poor judgment, I altered my behavior in tiny steps until I got better results. I suspect that in stocks, those faced with pure bad luck, might make extreme changes in their approach based on the false idea it was their own fault. While others, with poor judgment, might attribute their poor performance on bad luck and keep repeating their poor judgment. Hopefully the latter will quit before they are broke. 

Anyway, I hope you enjoy the book.


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## Just a Guy (Mar 27, 2012)

Pluto said:


> What I take from your post is your business success is not pure 100% luck. I agree.
> 
> I think you misunderstand the original question, which is probably my fault due to the way I posed it.
> there is a theory about stocks which says in part, that the Market Price always = Value. the implicit advice that flows from that is buy stocks at any price because you always get value.
> There is another theory which says Price is what you pay, value is what you get, and they are not always the same. The implicit advice here is look for undervalued stocks.


Well, if you put it that way, I suppose I could see an arguement for both cases. If there is a fool who'll pay market price, then, as a seller, that is the value. It's all a matter of perspective. What is value to one, may be a loss to another. As long as there is someone out there willing to pay the price, the arguement holds.

I remember a scam they used to run, and probably still do as there's nothing illegal about it. People would set up seminars in places like vancouver or Toronto and display "investment opportunities" for real estate in Saskatoon, Winnipeg or Edmonton (larger cities that you'd heard of). They'd show houses that were similar to those for sale in Vancouver or Toronto at half the price of the ones in those cities and encourage people to buy them...of course, those houses in Edmonton, Saskatoon or Winnipeg were only worth a quarter of the price because that's the local market.

These "savy investors" wound up paying double the price because they didn't know the market, but wanted in on the real estate boom...besides compared to the prices in Toronto and Vancouver, these were a steal!

To the sellers, these places had value...to the buyer, it wound up not so true.

Many on this board have scoffed at the idea I could be buying at the prices I do...to me, that's luck. Because people don't believe the places exist, they aren't even looking. I also need some luck for the properties to come on the market, I haven't seen any since last Xmas...though we are just starting to get into the slow period for real estate.

Now, there is also part of my buying theory which says, as long as I can rent enough to pay the expenses, any property I buy should have value...in fact, I could technically even lose money if I had a paycheque and still not lose (as I could claim the losses as a tax deduction). If some properties I own make a profit, enough to cover the losses on a different property, would I be further ahead in the long run? In 25 years, when the place is paid off, I could sell the property and still make a profit as I didn't use much or any of my own money...of course, I chose not to push my strategy to this limit, but in theory it should work.

BTW, just to clairify, I consider real estate to be an investment., of course different than my stock investments. I do have businesses, but they produce products and services...it kind of throws me when you talk about my real estate as a business, though it's important to treat it that way.


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## LBCfan (Jan 13, 2011)

I think both luck and skill apply. I'll even venture (without a lot of stats and history) that Lynch, Templeton, Munger and Buffet had/have that skill. Who cares, Buffet/Munger are still active and can (maybe) help your money grow quickly, but for how long? I wouldn't count on them for more than a year or two.

Other "professionals"? I haven't seen much. Those who do sorta well for clients like Chou and a few others do so mostly on low fees. The others, well would you rather own IG funds or IG stock?

I admit to being an indexer (using low-fee ETFs) but play around a bit in small caps. I only touch ones where I have more than public info, but nothing that comes close to insider info. For example, one of my neighbors is a low level R&D guy for a tech small-cap. They look pretty good on paper: P/E of 7, a 30% special divi every few years and a solid history of profit. One day he mentioned that IHO the potential product he was working on, if successful, would make it cheaper for its (few) customers to buy the company than the product. His opinion only, of course. With all else being favorable, I bit. Up 50% in a few months but time will tell. Unfortunately, I don't have the time, inclination or contacts to expand this method over world's markets or even the TSX.

Yes there will be more people like Lynch, Templeton, Munger and Buffet. Your job is to find them early. Will that be luck or skill?


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## doctrine (Sep 30, 2011)

What is the market? You didn't define it. How can you conclude anything before you describe what you are trying to outperform? 

For example, if it's the S&P 500, then are you asking is it possible to outperform with skill the cap weighted US large cap stock selections of a group of managers at S&P?


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## GoldStone (Mar 6, 2011)

I found the debate between Pluto and OptsyEagle rather ironic.

Pluto argues on the side of skill; OptsyEagle on the side of luck.

Yet, what do I see in my portfolio? I see two big winning stock ideas that I owe to OptsyEagle (3.5X and 2.5X). His stock pitches were so convincing, even an indexer like myself couldn't resist. 

Pluto: words are cheap. Please start sharing your skillfully researched ideas the way OptsyEagle does occasionally. That will go a long way to proving that skill can beat the market. each:


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## OptsyEagle (Nov 29, 2009)

Hey, sometimes I get lucky. lol.

One stock I suspect you are talking about is AutoCanada (ACQ). It probably highlights some of the points I am trying to make, albeit with more of a happy ending. I can walk you though the skill and luck analogy, with this one, that I believe gets repeated by investors over and over again. Retail or professional investors.

I came across this stock (lady luck guiding me to it) in 2009 when it was about $3.30 a share, down from about $11.00. If I recall it had some ugly car sales data and the world was suspecting a depression type recession, probably crushing car sales for the years ahead. The biggest concern for ACQ however, was that most of their dealerships, at that time, were Chrysler, and that company was currently headed or in bankruptcy. Since Chrysler Credit provided ACQ with their dealer floor financing, the consensus opinion was that ACQ would lose that, and probably no other bank would run to them to provide it. Without floor financing, all the cars in the dealership would be repossessed by Chrysler's creditors and it is pretty hard to sell cars when you don't have any on the lot. Hence $3.30 per share. I think it might have traded down to a buck or so during this scary time.

What I saw, however, was that the dealership earned about $0.25 per share on their repair business, and my thinking was that even if people didn`t buy new cars, they would certainly have to fix their old cars. They were still profitable and almost all their debt was this floor financing and not really a concern in creating an ACQ bankruptcy, although at first blush it would appear to the less skilled or lazy investor that ACQ was wallowing in debt. I also knew, however, that if their car sales business went into the toilet, their repair business would slowly follow. 

So, like many of my investments, I say *"Yes a lot of risk, but a lot of opportunity, however if I can just find 10 companies with these same attributes, the law of probabilities should make it profitable, even when a few end in complete disaster".*

Not sure what that statement above is, but to me it is a combination of skill and luck. I am technically using and hoping for both, since I have no crystal ball.

Fast forward to the future and I can tell you honestly that I had no idea this stock would go to over $90 per share in 5 years and currently sit above $60. I thought maybe, if I was right it would go back to the $11 range it was at before the "credit crisis" recession started. I would love to say, that this investment was all skill, but I can honestly tell you that everything that happened after $11 was definitely all luck, since I had absolutely no way of seeing how well this company would do in the future. To end this story, the unfortuneate part about good luck is that it is usually followed by bad luck. I eventually sold this stock a couple years ago at around $13,50 or so, when the CEO started becoming a partner in the GM dealerships, which I feel is a bad conflict of interest. Not sure if that decision was bad luck or bad skill. Time will tell.

Now overall, is this result good luck or bad luck, good skill or bad skill, when one buys a stock at $3.30 and sells it at $13.50 and the stock eventually goes to over $60? It is what it is. A big combination of both. Without both skill and luck this story would not be told. It is my opinion, however, that luck played a much larger role in it then skill, as it did with the many of my stock stories that turned out differently, or the same.


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## GoldStone (Mar 6, 2011)

My post #43: I was kidding, of course.




OptsyEagle said:


> Now overall, is this result good luck or bad luck, good skill or bad skill, when one buys a stock at $3.30 and sells it at $13.50 and the stock eventually goes to over $60? It is what it is. A big combination of both. Without both skill and luck this story would not be told.


My ACQ story echoes yours.

I bought 1000 shares at $4.40. The stock did absolutely nothing for ~6 months. I needed money for something else so I sold it. The stock went on an epic run soon after I sold. That was painful to watch. I bought back 400 shares at $14.xx and another 400 at $17.xx. I had money to buy more but I didn't. I thought the stock was too risky after a huge run-up.

Was it good skill or good luck to buy it at $4.40?
Was it bad skill or bad luck to sell it at the same price?
Was it good skill or good luck to buy it back in the $14 to $17 range?
Was it bad skill or bad luck to limit my position to 800 shares?




OptsyEagle said:


> It is my opinion, however, that luck played a much larger role in it then skill, as it did with the many of my stock stories that turned out differently, or the same.


I agree. My story with ACQ is one giant comedy of errors. I think it's mostly luck.

*"Performance is what happens when events collide with an existing portfolio."* -- Howard Marks


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## GoldStone (Mar 6, 2011)

Side note to Pluto:

I have no doubt that Templeton, Lynch, Buffett, Munger are highly skilled investors.

I am willing to grant you that their performance record is due mostly to their exceptional skill (with a small wallop of good luck thrown in).

So what? What are the practical implications for the rest of us? 

I don't see any.


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## Rusty O'Toole (Feb 1, 2012)

On the other hand there are money managers whose fame rested on large dollops of luck. Does anyone remember famous fund managers of the sixties like Gerry Tsai, Fred Mates, Fred Alger? Their mutual funds showed fantastic performance until the bull market peaked in 1969, then all the Go-go funds went-went. Conservative money manager Roger Babson liked to ask "which Fred promised you that?" when clients said they could get better returns elsewhere. He also called the Performance Fund fad " a national crap game" and he wasn't far wrong.

There are always hot shots who make great returns for a few years because of some quirk or fad that causes a bull market in their favorite stocks but they usually go broke and disappear when the fad fades. 

I'm sure right now there are so called investment experts hyping the next Pets.com or Qualcast (*cough* alibaba *cough*) but anyone who does his due diligence will not get sucked in. Unfortunately some of these fly by night companies can go up by 100% or 1000% before they blow up.


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## Pluto (Sep 12, 2013)

Rusty: Re the late 60's. Correct me if I'm wrong but didn't Buffett wind up his partnership in the late 60's and return their money saying something like he didn't see any appreciation potential? And didn't Temptations growth fund chug along fine? Templeton's advice was buy during times of pessimism, and bull markets end in optimism and/or euphoria -sell then. Also Buffet and Munger believe in being being fearful when everyone is greedy, and greedy when everyone is fearful. That's a different way of saying what Templeton said about pessimism and euphoria. So it looks to me like the Go Go funds you speak of had the right idea to start with, but declined to notice the euphoria was telling them to sell, as Buffett did. At the time, Templton was pioneering global investing, so he was probably a net seller of US stocks, and looking elsewhere for value while the Go Go funds held through euphoria and right into the next pessimistic phase. Interestingly, I read that Buffett is primarily looking overseas in depressed markets for big purchases right now. Seems to be taking a page out of Templeton's book. 

Goldstone: Did you read the TSLA thread? I'm not really looking for stocks to go long right now in NA, but there was a stellar opportunity in TESLA puts clearly laid out for you. Right now I'm interested in planning for and making money on the downside. I don't see much upside potential in NA right now and I think I have stated that many times. So there is your idea and a pick that was offered last Sept. If you want longs right now, ask someone else. Cheap words: It isn't ironic that you chronically jump to conclusions and criticize before you check. Anyway, I'm making money in the pick you seem to assume isn't there, and I posted it when I bought. 

Lynch wrote that Will Rogers gave the best investing advice: "don't gamble. Take all your savings and buy some good stock and hold it until it goes up, then sell it. If it don't go up, don't buy it." So, Goldstone, why did you buy ACQ when you did? You didn't follow the advice, "if it don't go up, don't buy it". What stopped you from taking good advice? Why didn't you put it on a watch list, then buy when it started to go up? 

OptsyEagle: You didn't pick ACQ according to your luck theory. the luck theorists used a monkey to throw darts at the stock tables, and they bought what ever the dart hit. OK so you got lucky, according to you, ands you bought a stock that went up. You bought it at a time that fits the views of Templeton and Buffett, and it went up to 90, corrected to 60. Now what are you going to do? Are you going to follow through with the rest of their strategy? Or are you going to divert from their strategy and then say "they are lucky" instead of "I didn't t follow through with the rest of their strategy and lost." You came early to the party on ACQ. You enjoyed the party. To me it looks like the host is cleaning up the place, yawning, and looking at their watch, and you don't notice. If you fall asleep the host might eat you for breakfast. Read Will Rogers advice above. 

Doctrine: The market is the one you are investing in. 

LBCfan: My job is not to find the next good pros early. I'm a do it yourself investor. So my job description was to learn how to do it so I didn't have to depend on them. My assumption in learning was to study the best pros and internalize whatever I could. (Some DIY investors don't want to do that, so dollar cost averaging into etfs is a good way for them to go). there is always risk, so there is always some chance factor. The most successful ones have a skill that the others don't. I think the skill is learnable for those who are motivated.


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## humble_pie (Jun 7, 2009)

pluto when the couch potato ETF salesmen on here sneakily betray their faiths & buy an individual stock that goes to the moon, they skip to the bank while laughing Oh It Was All Just Luck.

then when markets fall they go What Can You Do, by Definition an Index Has No Skill.

they so tricky


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## GoldStone (Mar 6, 2011)

Pluto said:


> Goldstone: Did you read the TSLA thread? I'm not really looking for stocks to go long right now in NA, but there was a stellar opportunity in TESLA puts clearly laid out for you.


It's stellar only in retrospect. Everyone knows that Tesla fundamentals make little sense. There is no skill in saying that. Tesla stock is driven by emotions, not fundamentals. To make money in puts, you need to time the emotional swing of the market just right. This requires a large degree of luck. Do this 10 times in a row with 10 different stocks -- then we can talk.

*"Investment business is full of people who got famous for being right once in a row."* --Howard Marks


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## GoldStone (Mar 6, 2011)

HP, fyi

My recent stock picks in my play money account:

Stock A: down 18%
Stock B: down 22%
Stock C: down 9%
Stock D: down 9%

CMF is like Lake Wobegon. All stock pickers are above average, not to mention very pretty. I must be the only exception. each:


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## humble_pie (Jun 7, 2009)

GoldStone said:


> HP, fyi
> 
> My recent stock picks in my play money account



oh no, play money accounts don't count, i mean your real-life accounts.

the TFSA you told us was in the 50k range, for example. Plus i believe i recall that you said missus goldstone's was even higher?

that lovely growth might be the real-life ACQ shares that you put in there? some of those 800 golden hand-picked shares at 14.xx & 17.xx?


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## GoldStone (Mar 6, 2011)

Those money losing positions are all real dollars. Not paper money. 

Both TFSAs are down from 50K range to 40K range.

I was very lucky last year and the year before. My luck has run out this year.


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## humble_pie (Jun 7, 2009)

but you just said "play money" earlier today, so of course i believed you ...

how could 800 shares of ACQ at 14.xx & 17.xx be losing money? how could they be bringing you anything but joy?

actually your luck hasn't run out. Even if you do a plain GIC ladder from now on, a GIC ladder on 50k is going to pull in more income than would a GIC ladder on 36 or 38k, which is what your account would roughly hold if you'd been doing couch potato all along ...


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## Rusty O'Toole (Feb 1, 2012)

"Rusty: Re the late 60's. Correct me if I'm wrong but didn't Buffett wind up his partnership in the late 60's and return their money saying something like he didn't see any appreciation potential?"

Fascinating episode in Buffett's career. In the late sixties he basically sat on his hands for 2 or 3 years because he could not find anything worth buying. The investors in his partnerships got antsy and asked questions like, what are we paying you for?

It was at this time that he announced he was retiring. The reason was, after 15 years of successful investing his methods didn't work anymore and he was too old to learn new ones. So he wound up the partnerships, and put all his money into Berkshire Hathaway. His loyal clients bought Hathaway shares. By changing from a partnership to a stock he could ignore critics.

He did this I believe in 1969 which was the absolute tippy top peak of the market.

Five years later as the market bottomed he announced he was coming out of retirement. The way he put it was, when he looked at the stock market he felt like an over sexed guy in a harem. He did not know what to grab first.

Buffet has never tried to time the markets in his life and finds the idea that anyone can successfully pick tops and bottoms, to be risible. Yet he picked the top, and the bottom, without even trying. Just by looking at value compared to price.


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## GoldStone (Mar 6, 2011)

humble_pie said:


> Even if you do a plain GIC ladder from now on, a GIC ladder on 50k is going to pull in more income than would a GIC ladder on 36 or 38k, which is what your account would roughly hold if you'd been doing couch potato all along ...


36 or 38K is a low estimate.

Our TFSAs have been fully invested in Canadian equities since inception. I use TD Canadian Index e-fund as my passive benchmark.

The spreadsheet assumes maximum allowed contribution on Jan 1st each year.











$41,955 is the number to beat for an all-stock Canadian TFSA.


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## uptoolate (Oct 9, 2011)

humble_pie said:


> but you just said "play money" earlier today, so of course i believed you ...


I think that Goldstone was probably referring to the 'play money' that some Couch Potato advocates suggest one keep outside of their core holdings just to make one's life interesting if one is into that kind of excitement. It doesn't refer to 'pretend accounts' just to see what might have been. It's real money.


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## GoldStone (Mar 6, 2011)

^ Yes


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## humble_pie (Jun 7, 2009)

GoldStone said:


> 36 or 38K is a low estimate ... $41,955 is the number to beat for an all-stock Canadian TFSA.



i have no idea why you are quibbling about 4k! my main point is still 100% accurate! a conservative portfolio such as a plain GIC ladder, from now on, is going to earn more revenue from 50k than the same portfolio can possibly earn from 41k.

as for the canadian equity index benchmark, no one could possibly know that your TFSA was all-canadian equities.

all we knew is what you had posted. That the tax-free reached a high watermark in the $50k range. That it out-performed because of one (1) cherry-picked stock holding. That you are the proud owner of 800 curated shares of ACQ with a cost base averaging (14.xx + 17.xx) / 2. That some of these shares might be accounting for the TFSA's out-performance.

since the nature of the TFSA was unknown, & since you are transparently an ETF industry spokesperson, i roughed a ballpark estimate for a standard 4/4 balanced couch potato formula for the period. 

there was no way anyone could know you had cherry-picked a geographical sector for your TFSA. Certainly no way anyone could cherry-pick a benchmark.

as i say, the point i had hoped to make remains 100% valid. Saving with 50k earns more than saving with 41k, or saving with 38k.

the same sequelae apply to young people who begin to save early in life. Once they reach a certain age & a certain level of saving, everything becomes bigger, better & easier. I always hope they can get close to $50k before the age of mortgages, kids, tuition, orthodontia, college, even sometimes divorce or ageing parents, sets in.


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## GoldStone (Mar 6, 2011)

I am not quibbling about 4k. I was curious to find out what the right benchmark value was. That's all. Sorry I didn't express myself clearly.

As of today, our two TFSAs are worth ~90K combined. 50K range per account is come and gone.
Benchmark is worth $41,955 * 2 = ~84K.
We are ahead by 6K.

Is it skill or luck?

We owe our TFSA record to one winner. All other picks -- seven or eight of them -- were duds. One winner out of 7-8 is a poor batting average. I have not proven to myself that I have any stock picking skills. 

The bottom line is, I believe that our market beating performance is mostly luck.


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## My Own Advisor (Sep 24, 2012)

Well, likely a bit of luck, yes. 

I know our TFSAs have been dragged down by poor REIT performances in recent years and one other dividend payer. Otherwise, rather even still, we're close to the benchmark you listed above GoldStone.


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## humble_pie (Jun 7, 2009)

GoldStone said:


> ... We are ahead by 6K ... Is it skill or luck?
> 
> We owe our TFSA record to one winner. All other picks -- seven or eight of them -- were duds. One winner out of 7-8 is a poor batting average. I have not proven to myself that I have any stock picking skills.
> 
> The bottom line is, I believe that our market beating performance is mostly luck.



the 5 short years of a TFSA's life are not enough to make a judgment call imho.

equity investing, whether via indexation or individual stock selection, is a lifetime commitment. It's not possible to rule on skill or luck with a brief 5-year experiment.

if anything, goldstone's superior stock out-performance might be suggesting that ETF couch potato is *not* the way he should go. He out-performed the benchmark, which in turn was one high-performing cherry-picked sector chosen from a standard, balanced, regular ETF couch potato. So there was considerable selection going on here.

in addition, we don't know the nature of the other 3 stocks in this small portfolio, or the 7 or 8 he says the TFSA has owned over time. From the frivolous title "play money," one can imagine that all stocks were as marginal & as racy as was ACQ itself at the time when it could be purchased for 14.xx & 17.xx.

goldstone is complaining about sub-performance of his other 3 stocks, but the fact is that one stellar performance in a universe of 7-9 emerging small caps/microcaps is about as good as things will ever get. It's my understanding that the standard drill with microcaps is a minimum of 15 or 20, then start ruthlessly weeding out the non-performers in order to capture one or at best 2 winners.

if goldstone had wanted to follow a less risky path he could have selected an Argo 5-pack portfolio formula. For TFSA, Argo advocated choosing 5 top stocks according to conventional criteria from the TSX top 60, ie a very different approach from a short list of canadian small caps, which often have little institutional following & tend to be neglected in this country.

five years are still early days, but indications suggest that goldstone is indeed endowed with skill & should continue picking at least some cherries :tongue-new:


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## Pluto (Sep 12, 2013)

GoldStone said:


> It's stellar only in retrospect. Everyone knows that Tesla fundamentals make little sense. There is no skill in saying that. Tesla stock is driven by emotions, not fundamentals. To make money in puts, you need to time the emotional swing of the market just right. This requires a large degree of luck. Do this 10 times in a row with 10 different stocks -- then we can talk.
> 
> *"Investment business is full of people who got famous for being right once in a row."* --Howard Marks


Retrospect is from your perspective. It was pretty obvious to me in advance due to an accumulation of clues. If one watches for the clues, you can put the odds in ones favour. But I don't expect you to agree. I think tsla is driven by fundamentals and emotions. I just waited until I saw euphoria, then watched price and volume for clues of a change in direction. It looked to me the tide that lifted the fast grower boats had turned. That was pretty obvious since the Russel 2000 had turned down, and there was TSLA still levitating. Seemed to be just a matter of time. 

Right 10 times in a row. Hmmm, why do I think you are setting standards for me that you do not hold for yourself? 

You seem to have a rock in your hiking boot and you think I put it there. Really, I had nothing to do with it. I'm not stopping you from starting a thread in which you describe your investment style and strategy. I believe there are numerous strategies and they can all work. I believe it is up to the individual to pick one that suits them. You seem to be assuming there is only one way, for everyone, and it is yours. So why hold back in describing it?


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## Pluto (Sep 12, 2013)

Rusty O'Toole said:


> "Rusty: Re the late 60's. Correct me if I'm wrong but didn't Buffett wind up his partnership in the late 60's and return their money saying something like he didn't see any appreciation potential?"
> 
> Fascinating episode in Buffett's career. In the late sixties he basically sat on his hands for 2 or 3 years because he could not find anything worth buying. The investors in his partnerships got antsy and asked questions like, what are we paying you for?
> 
> ...


Excellent post. Deserves repeating so I quote it in full.


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## namelessone (Sep 28, 2012)

Superior result is not an indication of a skilled investor (luck) but a skilled investor will certainly produce superior result. (Non luck)
Only 10% of people can be in the top 10% so stop whining if beating the market average is so easy everyone will be doing it.


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## LBCfan (Jan 13, 2011)

Pluto said:


> LBCfan: My job is not to find the next good pros early. I'm a do it yourself investor. So my job description was to learn how to do it so I didn't have to depend on them. My assumption in learning was to study the best pros and internalize whatever I could. (Some DIY investors don't want to do that, so dollar cost averaging into etfs is a good way for them to go). there is always risk, so there is always some chance factor. The most successful ones have a skill that the others don't. I think the skill is learnable for those who are motivated.


My comment was not about you specifically. You can buy whatever stocks you want and prosper if you do well. If you can do well, I applaud you. 

My comments about skill applied to MF companies/managers since Templeton and Lynch fit in there. I heard (a possibly unintended and unwritten) suggestion that the MF industry has a few managers like Templeton, Lynch and Buffet yet to come. You obviously (now) weren't suggesting investing with them but investing like them, that's a good idea. If the MF industry has actually has a few of those previously named yet to come, how does Joe Average know who to pick? That was my point.


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## avrex (Nov 14, 2010)




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## Just a Guy (Mar 27, 2012)

Well, math would say somebody is beating the average...quite a few people actually, since there are a lot of people not beating the market...if you beleive the "averages" really represent the stock market that is, not just some random companies people picked out of a hat and made everyone believe has any meaning.


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## james4beach (Nov 15, 2012)

It's the big, crooked institutions that beat the averages. Goldman Sachs and JP Morgan can go an _entire quarter_ without a single losing trade. Does that sound normal to you?

I think they're using unfair advantages to achieve this kind of trading success. It's already been revealed that Federal Reserve minutes are released early to certain parties, including law firms that work for investment banks. JP Morgan is also a primary dealer for US treasury bonds, so they're obviously closely linked with QE and other stimulus programs.

In other words, it's not a fair playing field. YOU, the canadianmoneyforum reader, are likely to lose on any given trade. The winner of that trade will likely be a huge institution with insider links to central banks and government, and frankly you don't have a chance in hell of beating them on their home turf.


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## Janus (Oct 23, 2013)

Anyone who wants a good perspective on this thread should read the article "The Superinvestors of Graham-and-Doddsville", there are PDFs online (edit: here you go. http://www.bestinver.es/pdf/articul...f Graham and Doddsville by Warren Buffett.pdf). It makes the point that while there will be amazing investors out there simple due to random chance (think of people who flip heads 10 times on a coin), the fact that many of the century's best investors with incredible long-term track records all had the exact same pedigree - taking ben graham's class in the 1950s - points to discipline rather than randomness being a cause of superior performance.

I know a Toronto-based asset manager whose funds have beaten their benchmarks by 5-8% on a 15-20 year timeframe. In their Canada fund. In their Asia fund. In their Europe fund. This isn't random chance, it's their philosophical approach to investing. The place is anything but crooked. They're obsessed with being good stewards of client money. But they are an exception.


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## sags (May 15, 2010)

It would appear that Buffet still has the Midas touch...........

http://investorplace.com/2014/11/berkshire-hathaway-earnings-warren-buffett/#.VGO2R2e2-E8

He is in a unique position of having so much cash on hand........60 Billion at present.......and generates so much cash, that he can increase his profit per share by buying his own stock..........which he does occasionally.

He has bought Class A shares as they come up for sale........to sell and generate the cash he has committed to some charities.

He also says he will buy shares if he doesn't think the market reflects the true value of Berkshire Hathaway shares.

Or.......he can use the cash to buy another cash generating company to increase share values.

He has said his biggest problem is finding something worthwhile to buy.

Pretty impressive record...........over the short and long terms.

Given his record, I think Buffet has been more successful due to skill than luck.


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## Rusty O'Toole (Feb 1, 2012)

There are many examples of investors, or money managers, who made outstanding returns in a certain kind of market but fell apart when market conditions changed. Tech experts who made money in the late 90s and lost it in 2000 and the like.

Jesse Livermore, and similar traders who "swung a big line" in the twenties boom needed a market they could turn around in. This meant the ability to buy or sell 50,000 shares of market leaders like Union Pacific, Big Steel or Anaconda Copper in a day or two. 

Since these stocks sold for $100, $200 or more we are talking about $5,000,000 or $10,000,000 in one trade. You could do that in the late twenties when the New York Stock Exchange was trading 5,000,000 shares a day.

Then came the Dirty Thirties. Old timers talk of brokers playing baseball on the stock exchange floor for something to do. Others remember old men dozing in their chairs in a brokerage office, waking with a start when the stock ticker clattered for a few seconds. Someone would amble over and read off the trade, 20 shares of Montgomery Ward at $7. Then the ticker would go silent for half an hour.

How does a trader make money in that kind of market?


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## Janus (Oct 23, 2013)

Rusty O'Toole said:


> There are many examples of investors, or money managers, who made outstanding returns in a certain kind of market but fell apart when market conditions changed. Tech experts who made money in the late 90s and lost it in 2000 and the like.


That's why you can only assess someone over a complete market cycle, usually 10 years +. Buffett clearly passes the test.



Rusty O'Toole said:


> Then came the Dirty Thirties. Old timers talk of brokers playing baseball on the stock exchange floor for something to do. Others remember old men dozing in their chairs in a brokerage office, waking with a start when the stock ticker clattered for a few seconds. Someone would amble over and read off the trade, 20 shares of Montgomery Ward at $7. Then the ticker would go silent for half an hour.


How does a trader make money in that kind of market? No clue, but investors like Ben Graham sure managed to. Investor vs. trader mindset.


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## gt_23 (Jan 18, 2014)

Janus said:


> That's why you can only assess someone over a complete market cycle, usually 10 years +. Buffett clearly passes the test.
> How does a trader make money in that kind of market? No clue, but investors like Ben Graham sure managed to. Investor vs. trader mindset.


I'm not disputing Buffett's record, but I don't understand why he's constantly compared to SPX.

I wonder how he compares to the average performance of PE and HF. On the surface, he claims to be a stock market investor, but I'm not so sure after reading his bio.


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## HaroldCrump (Jun 10, 2009)

gt_23 said:


> I wonder how he compares to the average performance of PE and HF. On the surface, he claims to be a stock market investor, but I'm not so sure after reading his bio.


There are two Buffett's - the media Buffett and the real Buffett.
The media Buffett talks up the stock market, value investing, buy & hold, etc.

The real Buffett buys good businesses and takes them private i.e. out of the stock market.

He uses all types of financial instruments such as options, warrants, specially crafted & structured debt and preferred share instruments to secure his position, and secure his dividend income.

Buffett has a whole another line of business in the debt & convertible market, outside of the stock market. Esp. in distressed and re-structured debt.
In fact, in the 1970s and 1980s, debt restructuring was a big part of Buffett's strategy, and brought him excellent returns.

Buffett loves making his deals outside the stock market, such as special arrangements, PPP, and politically brokered deals (such as his stake in BOA and GS politically brokered with the Treasury Dept.)

With Buffett, you have to watch what he's doing, not what he's saying.


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## sags (May 15, 2010)

A timely post Harold.........

It was announced that Buffet is trading P & G shares to buy the Duracell brand from them.

P & G will invest another 1.7 billion into the company before the deal closes, and Buffet will pay 50% of the 7 Billion purchase price Gillette paid to acquire Duracell.

He also avoids a big capital gains tax bill with the swap.

Buffet estimated his P & G shares originally cost him 336 million.

Another world leader........cash flow generator..........added to his stable.

http://www.ctvnews.ca/business/warren-buffet-buys-into-the-duracell-battery-business-1.2100046


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## gt_23 (Jan 18, 2014)

Janus said:


> Anyone who wants a good perspective on this thread should read the article "The Superinvestors of Graham-and-Doddsville", there are PDFs online (edit: here you go. http://www.bestinver.es/pdf/articul...f Graham and Doddsville by Warren Buffett.pdf). It makes the point that while there will be amazing investors out there simple due to random chance (think of people who flip heads 10 times on a coin), the fact that many of the century's best investors with incredible long-term track records all had the exact same pedigree - taking ben graham's class in the 1950s - points to discipline rather than randomness being a cause of superior performance.
> 
> I know a Toronto-based asset manager whose funds have beaten their benchmarks by 5-8% on a 15-20 year timeframe. In their Canada fund. In their Asia fund. In their Europe fund. This isn't random chance, it's their philosophical approach to investing. The place is anything but crooked. They're obsessed with being good stewards of client money. But they are an exception.


Who is the PM?

Perhaps it was the discipline learned from Ben Graham AND the fact that they all came into their prime during one of the greatest and longest runs of all time. This doesn't disprove that the market is efficient, nor does it prove that value investing wins over the long-run after transaction costs and effort.

It simply illustrates the likely case that sometimes skill is relevant and other times it is not.


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## Janus (Oct 23, 2013)

gt_23 said:


> Perhaps it was the discipline learned from Ben Graham AND the fact that they all came into their prime during one of the greatest and longest runs of all time. This doesn't disprove that the market is efficient, nor does it prove that value investing wins over the long-run after transaction costs and effort.
> 
> It simply illustrates the likely case that sometimes skill is relevant and other times it is not.


It's got nothing to do with bull runs. It's about making a +10% return during the financial crisis when everything else tanks 30%.


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## etfstrader (Sep 26, 2014)

There isn't a holy grail indicator or a set of indicators that would work 100%, but with the proper skills and knowledge, one can outperform the market by having the skills to identify low risk zones to enter a trade v.s. high risk zones to exit a trade.


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## lonewolf (Jun 12, 2012)

gt_23 said:


> I'm not disputing Buffett's record, but I don't understand why he's constantly compared to SPX.
> 
> I wonder how he compares to the average performance of PE and HF. On the surface, he claims to be a stock market investor, but I'm not so sure after reading his bio.


 Martin Armstrong has often said that Buffet has used insider information. Right before Goldman was given a pile of tax payers money in 08 many say Buffet had inside info before he bought Goldman shares?


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## Pluto (Sep 12, 2013)

gt_23 said:


> I'm not disputing Buffett's record, but I don't understand why he's constantly compared to SPX.
> 
> I wonder how he compares to the average performance of PE and HF. On the surface, he claims to be a stock market investor, but I'm not so sure after reading his bio.


One can buy a spx etf and be done with it. Professional money managers therefore try to beat it in order to get customers. They are all compared to the S&P 500. 
Same thing with DIY investors. Why not just buy index etf's? 

One can beat the market by buying index etf's and if one buys more on margin near the bottom of a bear market, then gets off margin in a year or two when the market is recovered.


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## Janus (Oct 23, 2013)

Pluto said:


> One can buy a spx etf and be done with it. Professional money managers therefore try to beat it in order to get customers. They are all compared to the S&P 500.
> Same thing with DIY investors. Why not just buy index etf's?
> 
> One can beat the market by buying index etf's if one buys more on margin near the bottom of a bear market, then gets off margin in a year or two when the market is recovered.


I don't see why this isn't the best approach for 90% of people, and that's coming from a professional investor working in a giant mutual fund.


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## etfstrader (Sep 26, 2014)

Pluto said:


> One can buy a spx etf and be done with it. Professional money managers therefore try to beat it in order to get customers. They are all compared to the S&P 500.
> Same thing with DIY investors. Why not just buy index etf's?
> 
> One can beat the market by buying index etf's if one buys more on margin near the bottom of a bear market, then gets off margin in a year or two when the market is recovered.


That's a wise decision to invest by using etf's. Each ETF is a basket of stocks or industries/sectors, which one rotten apple (i.e. one company's stock) won't have much impact to the rest. Instead of spending tons of time to research and analyze each individual stock to find its intrinsic value, one can just focus time and resources on analyzing the market's trend in order to see the big picture since most of the stocks follow the trend of the market anyway. Once one has the ability to distinguish between a bull and bear cycle, one can pretty invest into any kind of equities or etf's with much less risks.


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## Eclectic12 (Oct 20, 2010)

Janus said:


> I don't see why this isn't the best approach for 90% of people, and that's coming from a professional investor working in a giant mutual fund.


You are assuming people are not intimidated by investing which is "complicated so that it's best left to the pros" and have learned enough to find a way that suits them.
Or they think what little they do know makes them an expert and then when it's proven otherwise, they give up instead of learning from it.

Most I try to talk to are not interested ... sad but true.


Cheers


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## Rusty O'Toole (Feb 1, 2012)

Buffett and other pro investors recommend index funds to those who do not want to learn to invest the hard way.

If you want to be fully invested during bull markets and in cash during bear markets just sell when the 50 day moving average crosses below the 200 day moving average, and get back in when it crosses the other way. Look at a chart of the S&P with these 2 MA's on it, and you will see what I mean.

Calculate how you would have done over the last 10, 20 or 50 years, buying the S&P by this system and wonder why you bother investing any other way.


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## Rusty O'Toole (Feb 1, 2012)

Buffet started out as a classical value investor, a disciple of Benjamin Graham. Later he added some elements of growth stock investing. These days his account is so big, he just buys whole companies.

But if you ask him how to invest he still recommends value investing which still works for the average investor. There is no point in him telling you how to buy whole companies because you don't have billions of dollars to invest.

And, if you say you don't know how to do value investing and aren't interested in learning he will suggest you buy index funds, because you will still beat the average money manager with minimal risk and minimal effort.


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## lonewolf (Jun 12, 2012)

Rusty O'Toole said:


> Buffett and other pro investors recommend index funds to those who do not want to learn to invest the hard way.
> 
> If you want to be fully invested during bull markets and in cash during bear markets just sell when the 50 day moving average crosses below the 200 day moving average, and get back in when it crosses the other way. Look at a chart of the S&P with these 2 MA's on it, and you will see what I mean.
> 
> Calculate how you would have done over the last 10, 20 or 50 years, buying the S&P by this system and wonder why you bother investing any other way.



Rusty I think your on to something there, Let the market (price) tell you when to buy & sell (KIS)


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## gt_23 (Jan 18, 2014)

Pluto said:


> One can buy a spx etf and be done with it. Professional money managers therefore try to beat it in order to get customers. They are all compared to the S&P 500.
> Same thing with DIY investors. Why not just buy index etf's?
> 
> One can beat the market by buying index etf's and if one buys more on margin near the bottom of a bear market, then gets off margin in a year or two when the market is recovered.


I think you're missing my point. Buffett's performance should be compared to other HF, which is basically what he is despite his corporate structure.


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## gt_23 (Jan 18, 2014)

Janus said:


> It's got nothing to do with bull runs. It's about making a +10% return during the financial crisis when everything else tanks 30%.


This is isn't an unimportant factor, but it's rather naive to try and attribute to a single cause and effect. Given the number of negative years since the start of 1970, it's probably not as important as you think it is. Just as bull markets make mediocre investors look good, they make good investors look even better. The long-term records of the best managers during this time were driven by a subset of individual winners that increased, 10-, 100-, 1000-fold, etc., in turn driven by the industrial, technological, and economic growth of the period. Preventing drawdowns (temporary or otherwise) is much less important in periods of exponential growth.

Finally, achieving +10% in a -30% year is probably more about advanced risk management, than it is about value investing, which I'm sure you know.


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## GoldStone (Mar 6, 2011)

The Folklore of Finance: Beliefs That Contribute to Investors’ Failure - NYTimes.com

=====

Investors generally seek returns that beat a benchmark, known as alpha in financial jargon. But the reality is that alpha barely exists today — at least alpha that is achieved through skill and not luck.

In 1990, 14 percent of domestic equity mutual funds achieved “true” alpha — which was defined in a University of Maryland study as alpha that was not achieved by chance. In 2006, the number of funds delivering true alpha was down to 0.6 percent, which is statistically equivalent to zero. Five times as many funds operated in 2006 as in 1990.

Investors are not oblivious to the difficulty. Only 53 percent of individuals say they believe alpha is attainable by skill, while even fewer professionals, only 42 percent, attribute any performance above the benchmark to skill.

Why this has happened is a paradox of our age: Investors have both greater skill and more information to make outstanding performance more challenging. Think of it as standing up at a baseball game. If you do it alone, you have a better view. If everyone stands, only the tallest have a chance of seeing better than if everyone was still seated.

Yet the financial industry continues to search for alpha as if it were a great white whale. The study found that financial services firms spent 60 percent of their capital expenditures on resources to help generate short-term high performance. It is not for nothing: Active, as opposed to passive, money managers received $600 billion in fees in 2014, according to estimates State Street made from Boston Consulting Group’s Global Asset Management 2014 report. That amount is nearly equal to the gross domestic product of Switzerland.

=====


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## Rusty O'Toole (Feb 1, 2012)

It seems to me that the individual investor has a better chance of achieving alpha than any hedge fund or mutual fund. The bigger you are, the closer your investments must be to "average" by necessity. With large amounts of money to invest, you must buy the biggest companies or, buy the shares of so many smaller companies that your returns will resemble the S&P or other benchmark.

When Warren Buffet was making his best returns, in the fifties and early sixties, he never had more than 5 or 6 stocks in his portfolio. But when he started in 1954 he only had $160,000 under management.

He said a few years ago that if he was managing $1 million dollars or less he could make 50% a year, but that is impossible when you are investing billions.


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## Rusty O'Toole (Feb 1, 2012)

Another factor I don't think anyone else has mentioned is the question of what kind of market we are investing in?

Since March 2009 plain old buy and hold has beaten everybody. Hedge funds are dropping like flies because they can't beat the S&P. It just keeps chugging higher. You can lay a ruler on the chart. Any dips are so minor it is hardly worth the bother of getting in or out, and no bear markets at all.

This is rather unusual. In other times we had the tech boom, and "hot" stocks of various kinds that paid their lucky or clever investors handsomely. There were times like 1966 - 1982 when swing trading paid off and buy and hold went no place. Times like 2007 - 2008 when you were better out of the market if you were not a short seller.

In other words there are many methods of investing or making money. Sometimes one method works, sometimes another. It would be a mistake to think that one method was better than the others at all times and under all circumstances.


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## Pluto (Sep 12, 2013)

gt_23 said:


> I think you're missing my point. Buffett's performance should be compared to other HF, which is basically what he is despite his corporate structure.


It would help me if you would specify what HF and PE is. Is HF = Hedge fund, and is PE private equity? When buffett buys some stock he thinks in terms of buying a business. He want to know what it produces. Then he wants to know how much he has to pay for the business. If the price is too high relative to what it produces, he doesn't buy.


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## Pluto (Sep 12, 2013)

GoldStone said:


> The Folklore of Finance: Beliefs That Contribute to Investors’ Failure - NYTimes.com
> 
> =====
> 
> ...


that's not a bad metaphor especially if you focus on standing alone during a very serious sell off EG 08-09. Get in there and buy. And when everyone is standing, sit down - take some profits, pair back....sit tight, be patient....

If one reads the pdf - the entire study - one may note that one of the folklore examples cited is professionals and investors rely on analyst forecasts despite accuracy rates as low as 5 - 10 %. 

I see that everywhere television, print media, forums - the market is fine now because earnings are good, dividends are increasing, and forecasts for next year are fine. but its always that way at the end. Another myth I read recently on a very renowned market journal was it is safe to be in stock now because US job creation is really good. Job creation is almost always really good when the bull ends. Job creation is almost always really bad when the market bottoms. 

So what to do? or not do? Take advantage of what an individual can do that pros can't. Individuals can be out of stocks in some minutes, pros can't is one thing. Also it is easy for an individual to be fully invested in short order. So focus on learning when to be out, and when to be in. My personal bias is to be in during the bulk of a bull market, and strive to be out during a big chunk of a bear market.


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## londoncalling (Sep 17, 2011)

Here is something to ponder: Is there only one top and one bottom? If so, most would agree it is extremely difficult to time those two events. No matter your method, pick your style and follow it if it works. If it doesn't work find out why. Good investors learn from their mistakes. Not as many mistakes are made during market gains. Not many people learn anything from guessing right. That is how I define luck.


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## donald (Apr 18, 2011)

About luck vs skill and the mention of Buffett.
I read in snowball that Warren and Charlie spend over 80% of everyday reading and thinking.
He stated he believed the compound effect of knowledge was his greatest attribute.
I remember his protege todd combs took buffett's advice and had a daily habit of reading over 1000 pages a day of financials.
These guy read likely 7 days a week(that what buffett likes to do)that's over 7000 pages of selected material a week or 28,000 pages a mth or 336,000 pages a year of financials.
I would be willing to bet few(prob no one)comes close to that kind of studying.
I can't see how anyone could think buffett was 'lucky'
That is like saying Micheal Jordan was luck because of genetics or era of time or this that and the other while dismissing the fact he shot baskets on the practice court as much as he 'breathed' 
just my opinion on the luck vs skill.


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## etfstrader (Sep 26, 2014)

donald said:


> About luck vs skill and the mention of Buffett.
> I read in snowball that Warren and Charlie spend over 80% of everyday reading and thinking.
> He stated he believed the compound effect of knowledge was his greatest attribute.
> I remember his protege todd combs took buffett's advice and had a daily habit of reading over 1000 pages a day of financials.
> ...


The same as with the art of trading. Seven years ago, I started to to learn how to invest by often going to Chapters and Indigo bookstores to read all those investment and trading books for a year to two. Then, I started to do paper trading and continuing to master my skills by going through ton of materials on the internet and those professional blogs. From there, I took it to the next level to open an account with some savings and money from credit card, which I was so confident to think that I could beat the stock market. It turned out quite badly, but I didn't give up from there because I had strong passion with this stuff. Fast forward to the present day, I'm a full-time trader to making my livings by trading 3x leverage ETF's (i.e. highly volatile stuff). I trade less than 20-time a year and within last 3-year, I made enough profit to pay off for a house and to afford a comfortable life for me and my gf. I don't borrow money to trade and I don't trade with margin accounts and I've few hundred of thousand dollars in my trading account and with $200k sitting in cash account as emergency funds. The bottom line is that it's a very long and hard road (because there are many sleepless nights for years to do researching and practicing while working for a full-time job. At one point, my gf considered to split up with me because she thought that I had no life at all) to get to where I'm nowadays. My point is that in order to make consistent profits for year after year, it's all about skills and being disciplined to stick to the rules. Besides, even though I'm doing well with my current trading skills I always put myself as a student to learn from other pros. I still flip through tons of charts from other pros on daily basis to see if I could learn anything new.


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## etfstrader (Sep 26, 2014)

I'd like to show a simple up-to-date chart to show what I mean by following a set of rules to trade. I only use this chart (along with other charts) for the purpose to BUY or LONG the market for short-term time frame (i.e. 2 weeks to 6-week). Another screen shot showed that I exited SHORT position when market hit the bottom and then LONG the market when it started to rally. At this moment, I exited all LONG positions and started to SHORT the market since last Friday.


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## Pluto (Sep 12, 2013)

etfstrader said:


> I'd like to show a simple up-to-date chart to show what I mean by following a set of rules to trade. I only use this chart (along with other charts) for the purpose to BUY or LONG the market for short-term time frame (i.e. 2 weeks to 6-week). Another screen shot showed that I exited SHORT position when market hit the bottom and then LONG the market when it started to rally. At this moment, I exited all LONG positions and started to SHORT the market since last Friday.
> View attachment 2545
> 
> 
> View attachment 2553


Thanks for your input on this topic, etfstrader. Your story is believable. I hope you continue to contribute to this topic, and other topics.


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## Rusty O'Toole (Feb 1, 2012)

What do the various lines represent?


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## etfstrader (Sep 26, 2014)

Rusty O'Toole said:


> What do the various lines represent?


Those are market indicators showing market volatility and breadths. There are hundred of them, but the ones on that chart are the most reliable ones to follow what big institutions doing on BUY side since these big players are the ones who control the market.


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## etfstrader (Sep 26, 2014)

Pluto said:


> Thanks for your input on this topic, etfstrader. Your story is believable. I hope you continue to contribute to this topic, and other topics.


 I'm not an expert in the field of technical and market analysis, but I think I'm quite knowledgeable in these areas. So, I'm more than happy to share while learning at the same time from other pros on here.


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## Rusty O'Toole (Feb 1, 2012)

etfstrader said:


> Those are market indicators showing market volatility and breadths. There are hundred of them, but the ones on that chart are the most reliable ones to follow what big institutions doing on BUY side since these big players are the ones who control the market.


I got that, but which ones are they?


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