# About Alpha - Seeking Alpha - What's Important there?



## AbleEng (May 9, 2021)

I read that alpha as an investment characteristic was essentially abandoned after index funds came about. Yet I see a web site for it, and at least one person on the forum has profited by it. Any comments?


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## MrMatt (Dec 21, 2011)

For stock pickers you need good analysis.
I find the analysis on SA opinionated, but quite detailed.
With a good analysis and good questions/comments, I think it does help identify potential individual stock picks.

Specifically I did well with the following about 5 years ago
AMKOR - (not holding)
MU & AMBA (sold 50% for a nice gain a few years ago, still have half my original position)

it also allowed me to fine tune my understanding and eventuallyresulted in me buying AMZN & APPL >5 years ago


I think indexing is the correct strategy.
I think a few tactical stock picks is
1. Fun.
2. Possible to find a pricing discrepancy.
2b. Finding higher risk investments. 

If I was on SA today, I'd be asking when to sell AMBA, as I don't have good sell criteria.


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## james4beach (Nov 15, 2012)

AbleEng said:


> I read that alpha as an investment characteristic was essentially abandoned after index funds came about. Yet I see a web site for it, and at least one person on the forum has profited by it. Any comments?


Traditionally (we're talking until about 1990) fund managers were able to demonstrate "alpha", a return in excess of a benchmark index. An index ETF such as *IVV* for the US or *XIC* for Canada would be the reference benchmark. People try to achieve some alpha, to outperform the index.

This issue has been studied very extensively. Veterans of the investment field have noted that the structure of Wall Street has changed. Back in say the 1940s or 1970s, fund managers had all kinds of inside knowledge and had some "edge" which would give them an ability to outperform. The financial status of companies for example was largely concealed and kept private, but fund managers with inside connections were able to talk to the CEOs and CFOs and gain additional knowledge.

Unsurprisingly, investors with that kind of edge were able to achieve some alpha. This continued until the 1990s, when regulations were strengthened tremendously, which required that companies have to make special inside knowledge available publicly, broadcast it to everyone -- so that it's a more fair market.

*That marked a turning point, and along with easy electronic access to company filing documents (which was a game changer) the public markets became dramatically more fair and transparent starting in the 1990s.*

That's also around the time when "alpha" disappeared. Coincidence? Many industry experts don't think it's a coincidence. They think that insiders and people with connections used to have an edge, but now they don't -- by law.

Many people still think they can find some alpha. The web site is dedicated to that concept of seeking alpha.

But statistics on the performance of hedge funds and mutual funds strongly suggest that active management can no longer achieve any alpha, despite their best efforts. Whether it's stock picking or doing deep research into company fundamentals, it APPEARS that it's now extremely rare to find any alpha.

And it's probably because American / Canadian stock markets have become much more transparent and honest.

It's probably best to just invest in the stock index.


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

I've been doing very well trend following and finding turning points which is technical alpha or momentum seeking and nothing else. Can attest that it works if you do it right. There are a lot of ways of getting above average returns but they all take skill and effort, most people are better off to buy a fund that mimics the stock market average and let it go at that. The vast majority of mutual funds and hedge funds fail to beat the average.


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## MrMatt (Dec 21, 2011)

james4beach said:


> And it's probably because American / Canadian stock markets have become much more transparent and honest.
> 
> It's probably best to just invest in the stock index.


Yabbut, you could choose different indexes.
Myself I think there are still opportunities, particularly gambles on politics, or on smallcaps that the big investors aren't paying attention to.

For example, I thought that BEP was underpriced a decade ago.


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## james4beach (Nov 15, 2012)

MrMatt said:


> Yabbut, you could choose different indexes.
> Myself I think there are still opportunities, particularly gambles on politics, or on smallcaps that the big investors aren't paying attention to.
> 
> For example, I thought that BEP was underpriced a decade ago.


I do some stock picking as well, and have my own gambles, but the jury is still out on whether making these kinds of bets can achieve alpha over the long term.

Many researchers have studied this and found that very few money managers beat the index over the long term. So when you are picking stocks or trend following, you are hoping that you will be one of the very few people who beats the index.

Even hedge fund experts and professional traders have trouble beating the index.

I've been stock picking for about 5 years now, and am outperforming the TSX index. That's encouraging but doesn't mean much. It remains to be seen if I can beat the index over 10 years or 15 years.


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## MrMatt (Dec 21, 2011)

james4beach said:


> I do some stock picking as well, and have my own gambles, but the jury is still out on whether making these kinds of bets can achieve alpha over the long term.
> 
> Many researchers have studied this and found that very few money managers beat the index over the long term. So when you are picking stocks or trend following, you are hoping that you will be one of the very few people who beats the index.
> 
> ...


It is important to compare to the correct index.
Also I think if you take the index, and cut out the really stupid companies, you 

I've been stock picking for soemthing along 15 years, and I've handily beaten the respective indexes, even cutting out "obvious" outliers like Apple,Amazon and Google.


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## james4beach (Nov 15, 2012)

MrMatt said:


> I've been stock picking for soemthing along 15 years, and I've handily beaten the respective indexes, even cutting out "obvious" outliers like Apple,Amazon and Google.


You should start a hedge fund. You would beat 99% of the other hedge funds out there, with those kinds of results. You could become the top mutual fund manager in Canada.

Don't you think it's a bit funny that all the best stock pickers on the planet hang out on internet message forums, whereas actual fund managers are unable to beat the index?

And @AbleEng this is really the problem with achieving alpha. Everyone on the internet, and everyone with a newsletter, claims they can beat the market. *But* when real money is put on it, or someone does it professionally (with people MONITORING them) it turns out they can't.

What would you takeaway from that?


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## MrMatt (Dec 21, 2011)

james4beach said:


> You should start a hedge fund. You would beat 99% of the other hedge funds out there, with those kinds of results. You could become the top mutual fund manager in Canada.
> 
> Don't you think it's a bit funny that all the best stock pickers on the planet hang out on internet message forums, whereas actual fund managers are unable to beat the index?


It is an interesting phenomenon.
I'd like to point out that you also claim to be beating the index.



> And @AbleEng this is really the problem with achieving alpha. Everyone on the internet, and everyone with a newsletter, claims they can beat the market. *But* when real money is put on it, or someone does it professionally (with people MONITORING them) it turns out they can't.
> 
> What would you takeaway from that?


Just for "fun" here is part of one of my CDN accounts, current assets
CGO Bought 2013-09-25 - ok
PD Bought 2015-01-13 - bad investment
WFT Bought 2013-06-27, @80.1 pre-split - ok
Then KL, bought as DGC, but the history is really messy, suffice it to say I'm up 4x+ on my initial investment from 2013


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

It is MUCH easier to get outsized gains when you are handling a small amount of money and are not bound by the rules imposed by mutual funds and hedge funds. I heard that Warren Buffet said he could make much better percentage gains if he was managing a million or less. When you get up in the billions it is hard to beat the market because for all practical purposes, you are the market.


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## james4beach (Nov 15, 2012)

MrMatt said:


> It is an interesting phenomenon.
> I'd like to point out that you also claim to be beating the index.


Yes it's part of the mystery of stock investing.

I've been beating the index over ~ 5 years, but I don't think this will last. My guess is that over 10 or 15 years, I won't beat the index.

I think that my current outperformance is likely due to volatility or luck


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## bgc_fan (Apr 5, 2009)

Rusty O'Toole said:


> It is MUCH easier to get outsized gains when you are handling a small amount of money and are not bound by the rules imposed by mutual funds and hedge funds. I heard that Warren Buffet said he could make much better percentage gains if he was managing a million or less. When you get up in the billions it is hard to beat the market because for all practical purposes, you are the market.


Kind of, but when you're in the billions, you can do deals larger deals, like buy companies outright, which can't be matched.


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## Spudd (Oct 11, 2011)

I have felt like I've been doing awesome this past year.

Then yesterday, I compared my results on my 70/30 portfolio to VBAL, which is a 60/40 portfolio (less risky). VBAL has beaten me.

I am going to move everything except for my Wealthsimple Trade "fun money" account (about 2% of my overall portfolio) into VBAL. I'll keep the fun money account to satisfy my desire to "do something".

I am currently procrastinating on actually doing it, because I have a bunch of positions in things that I'm reluctant to get rid of. But by end of year I hope to have everything in VBAL.


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

bgc_fan said:


> Kind of, but when you're in the billions, you can do deals larger deals, like buy companies outright, which can't be matched.


You may not be able to buy the whole company but you can buy some stock. Unless the company is not publicly traded, but since there are some 300 stocks in Canada and 3000 stocks in the US this is not much of a barrier .


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## bgc_fan (Apr 5, 2009)

Rusty O'Toole said:


> You may not be able to buy the whole company but you can buy some stock. Unless the company is not publicly traded, but since there are some 300 stocks in Canada and 3000 stocks in the US this is not much of a barrier .


But that's the advantage that companies like Berkshire can do, buy private companies: 9 Reasons Joe 6 Pack Can’t Invest Like Warren Buffett

Or closer to home, have the CPPIB buy a controlling stake in the 407 ETR. You can argue that there are still a lot of public companies available, but that doesn't change the fact that if you have billions in a portfolio, there are certain things you can do.


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## james4beach (Nov 15, 2012)

bgc_fan said:


> But that's the advantage that companies like Berkshire can do, buy private companies: 9 Reasons Joe 6 Pack Can’t Invest Like Warren Buffett
> 
> Or closer to home, have the CPPIB buy a controlling stake in the 407 ETR. You can argue that there are still a lot of public companies available, but that doesn't change the fact that if you have billions in a portfolio, there are certain things you can do.


The other thing people miss about these large institutional investors (like Berkshire) is that when they buy a large stake, they also have a closer connection to management than you or I can ever have. So they can actually meet with the board, exert influence and some control. As they should, since they are major holders.

Or they get on the board. Meanwhile us small guys with 0.001% ownership in a company can't do jack. We're just along for the ride. HUGE difference.

As a comparison point, I have > 1% shares of a private company, and even with that small a slice, I still have quite a strong voice there. I can get meetings with the CEO and CFO, for example. It's a whole different game.


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## Jimmy (May 19, 2017)

FYI Gordon Pape just posted his updated Growth portfolio returns ytd in the G&M. 27%/yr over the past 9 yrs. His portfolio is below. Do some research and pick some good stocks and beat the market. Don't see why there is this insurmountable defeatism about beating a lazy market cap index.


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

I stand by my claim that it is easier to get large percentage gains on a small account than on one in the billions.


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## fireseeker (Jul 24, 2017)

Jimmy said:


> FYI Gordon Pape just posted his updated Growth portfolio returns ytd in the G&M. 27%/yr over the past 9 yrs. His portfolio is below. Do some research and pick some good stocks and beat the market. Don't see why there is this insurmountable defeatism about beating a lazy market cap index.


It's not defeatism, it's math. 
(You can find a link to William Sharpe's proof here. Sharpe won a Nobel Prize.)

If passive investors are matching the market, then active investors -- as a group -- must also be matching the market. And that's before taking into account friction and fees, which are higher for active investors. 
So, if active investors are beating the market, whose lunch are they eating? It can't be the passive investors', because they're getting a market return. So it must be coming from other active investors.
To quote the financial guru Clint Eastwood: "Do you feel lucky?"

This is not to pick on Gordon Pape. He's been stock picking for a long time. His reported 27% return is impressive, better than his growth portfolio's appropriate benchmark (assuming currency fluctations have been taken into account). The Nasdaq index (QQQ) has a 10-year return of 21.25%. 

Pape has lots of portfolios, BTW. His balanced portfolio cites a 10-year return of 7.87%. VBAL has a backtested 10-year return of 8.19%.

So Pape wins some and loses some. That's how it goes for active investing. 
However, if you were paying Pape 1% a year for his services, the return numbers start to change ...


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## Jimmy (May 19, 2017)

fireseeker said:


> It's not defeatism, it's math.
> (You can find a link to William Sharpe's proof here. Sharpe won a Nobel Prize.)
> 
> If passive investors are matching the market, then active investors -- as a group -- must also be matching the market. And that's before taking into account friction and fees, which are higher for active investors.
> ...


I am not talking about mutual fund mangers so that article and your pt are misguided and erroneous. Sure they can't beat the market having to choose 100+ stocks in a market like portfolio too. But a concentrated portfolio can easily as Pape shows.

The index is a mix of good and crappy stocks that avg out to an index return. So you pick a few good stocks and beat the average index. Pape isn't running a fund. It is his select growth portfolio of a few well chosen stocks. The most appropriate benchmark is the S&P 500 not the Nasdaq btw which had a return of 16.4%/yr . The US cos are all in the S& P 500 , one is on the NYSE and there are 3 Canadian TSX companies.

Btw his other indexes like the balanced aren't for growth so misleading and erroneous again. I just showed how a well chosen portfolio like Pape's can easily beat the market. You could even copy Pape if you don't know how to pick stocks and beat the market is the pt. It is just risk aversion that prevents people from trying to do better than the lazy low return index not math.


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## james4beach (Nov 15, 2012)

fireseeker said:


> Pape has lots of portfolios, BTW. His balanced portfolio cites a 10-year return of 7.87%. VBAL has a backtested 10-year return of 8.19%.
> 
> So Pape wins some and loses some. That's how it goes for active investing.


Pape does the same tricky stuff as other active managers. He talks a lot, tries to sound smart, but it's more from a marketing standpoint (because Gordon Pape is a shill for the active management industry).

As you point out, he has different portfolios. Dig up some of his old articles from years ago, and you'll see that one day he calls a certain mutual fund his favourite fund on earth, then seems to forget about it later. His favourite changes over time. Scattered messages, scattered portfolios, trying to sound like he can analyze market fundamentals and use it to his advantage.

It's this kind of flaky behaviour which seems to fool a lot of readers. It's the same flaky behaviour you will find on CNBC and The Motley Fool. And it fools a lot of people.

There is no evidence that people who do this kind of thing (that Pape and CNBC guests do) can reliably and consistently beat a passive index approach, based on *choosing one strategy/benchmark and not pivoting again*. Of course, that's not what they do. They constantly confuse matters by talking endlessly, introducing multiple strategies, and putting out contradictory information.

The kinds of games active managers play are highly effective at deceiving the investing public. Just look at CNBC and its viewership. Does it look like people have gotten tired of Jim Cramer and his horrendous track record? Or tired of all those guests who keep coming on, and changing their opinions every few weeks?


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## Spudd (Oct 11, 2011)

It is still literally math that determines active management _cannot_ beat the market as a whole. 

An individual active manager absolutely can. But how can you know in advance which ones will and which won't?

Having a long track record of success might be a clue, but long track records can end in tears also. There's no way to know for sure. 

The average retail investor in Peter Lynch's Magellan fund lost money, even though the fund was beating the market, because they would buy in when it had done well recently, and sell out when it had done badly recently. 








Council Post: How Investors Are Costing Themselves Money


The stock market may fluctuate, but your investment objectives shouldn't.




www.forbes.com


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## fireseeker (Jul 24, 2017)

Jimmy said:


> I am not talking about mutual fund mangers so that article and your pt are misguided and erroneous. Sure they can't beat the market having to choose 100+ stocks in a market like portfolio too. But a concentrated portfolio can easily as Pape shows.
> 
> The index is a mix of good and crappy stocks that avg out to an index return. So you pick a few good stocks and beat the average index. ...
> 
> I just showed how a well chosen portfolio like Pape's can easily beat the market. You could even copy Pape if you don't know how to pick stocks and beat the market is the pt. It is just risk aversion that prevents people from trying to do better than the lazy low return index not math.


The number of portfolio holdings is meaningless. ARKK has 48.

It doesn't matter if an active investor has a concentrated portfolio of two stocks or broad holdings of 200 stocks.
If that investor outperforms the market it means another active investor is falling short of the index. It is mathematically impossible for all active investors to beat the market. Their returns must average out to the index, before you subtract friction and fees.

To suggest otherwise is to believe active investors are all from Lake Woebegone, "where all the women are strong, all the men are good-looking, and all the children are above average."


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## MrMatt (Dec 21, 2011)

fireseeker said:


> If that investor outperforms the market it means another active investor is falling short of the index. It is mathematically impossible for all active investors to beat the market. Their returns must average out to the index, before you subtract friction and fees.


Just a clarification, it's not the # of investors that will have to run high/low of the index, is the number of dollar.investors.

ie 2 $100 investors can outperform by $10 each, if 1 $200 investor underperforms by $20.

The reality is that the chances of picking or being the outperformer are low, since due to fees, more than half the invested dollars will underperform the market after fees. It's basic stats & math.


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## Jimmy (May 19, 2017)

fireseeker said:


> The number of portfolio holdings is meaningless. ARKK has 48.
> 
> It doesn't matter if an active investor has a concentrated portfolio of two stocks or broad holdings of 200 stocks.
> If that investor outperforms the market it means another active investor is falling short of the index. It is mathematically impossible for all active investors to beat the market. Their returns must average out to the index, before you subtract friction and fees.
> ...


Yes ARKK is concentrated and destroys the market. You are misleadingly conflating all active fund managers w a few stock pickers. A fund manager again who has 250+ stocks will find it hard to beat the 500 stock market as his picks are also 50+% of the avg. They all wont beat the market. Completely erroneous to my pt too.

A select stock picker though who selects only 8 stocks like Pape or 48 like Cathy wood can easily select stocks to beat the market avg. Pape's stocks are only 1.6% of the avg.

Make it even simpler you could go out and buy Amazon or Microsoft and have a one stock portfolio that has destroyed the market for 15+ yrs. This isn't some hurculean task you defeatists seem to dread so much.


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## MrBlackhill (Jun 10, 2020)

james4beach said:


> Traditionally (we're talking until about 1990) fund managers were able to demonstrate "alpha", a return in excess of a benchmark index. An index ETF such as *IVV* for the US or *XIC* for Canada would be the reference benchmark. People try to achieve some alpha, to outperform the index.


Actually, I can't even know if I'm beating three market which represents my portfolio.

The market must have the same investable universe.

If I buy only small caps, then I can't compare my results to XIU, nor XIC, nor VCN because I'm investing in a specific subset of those markets.

Also, I've made huge money with OVV but even though it's available on the TSX, it's not part of any Canadian market because they are now a US company.

I also invest in some micro caps and even nano caps. No ETF holds assets of that size.

In the end, the most representative magnet e of my current Canadian portfolio that I started during the crash would be a blend of VCN and XCS. I could also argue that since I hold some ETFs with foreign exposure I should also take that into account.

And no matter how I blend them, I'm beating it because anyways the best performer since the crash was XCS and I'm beating that while holding some bigger caps.

I don't know how it'll turn on the long run and I'm not sure how I will benchmark.


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## MrBlackhill (Jun 10, 2020)

All I know is that if I had all invested my cashflow in XCS my MWRR would've been about +46%. If I had all invested in VCN, it would've been +32%. If I had done 50/50, it would've been +39%. But I'm about 22/38/30/8/2 large/mid/small/micro/nano with a MWRR of +54%. Track record not long enough to jump to conclusions though, pretty meaningless.


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## fireseeker (Jul 24, 2017)

Jimmy said:


> Make it even simpler you could go out and buy Amazon or Microsoft and have a one stock portfolio that has destroyed the market for 15+ yrs. This isn't some hurculean task you defeatists seem to dread so much.


Why the name-calling? 

We're just talking about math. Feel free to show the math that explains how an eight-stock portfolio can reliably beat the market. Two data points isn't proof.

I agree with you about Amazon and Microsoft -- identifying one stock that has destroyed the market for the last 15 years is trivially easy. But we can't invest in the past, only the future.


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## Jimmy (May 19, 2017)

fireseeker said:


> Why the name-calling?
> 
> We're just talking about math. Feel free to show the math that explains how an eight-stock portfolio can reliably beat the market. Two data points isn't proof.
> 
> I agree with you about Amazon and Microsoft -- identifying one stock that has destroyed the market for the last 15 years is trivially easy. But we can't invest in the past, only the future.


Because that is the side you are arguing. There is no math for Pape and others who just put forth recommended portfolios and aren't fund managers. The math is he made 27% while the market made 16%. Wood manages concentrated portfolio ETFs too not mutual funds either technically. That is why some prefer concentrated ETFs vs general indexes. More risk but more return.

And again you can go out and buy Microsoft or Amazon today and make those returns into the future if you follow their guidance. It is about risk aversion not math. You either are too afraid to make $ or you aren't . If 7%/yr is all you want and all you can handle that is fine too. Just don't say making anymore is unlikley.


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## MrMatt (Dec 21, 2011)

fireseeker said:


> Why the name-calling?
> 
> We're just talking about math. Feel free to show the math that explains how an eight-stock portfolio can reliably beat the market. Two data points isn't proof.
> 
> I agree with you about Amazon and Microsoft -- identifying one stock that has destroyed the market for the last 15 years is trivially easy. But we can't invest in the past, only the future.


The point is my personal portfolio has outperformed for the last 15 years.
So while I completely agree with ETFs and efficient market theory, I think there are adjustments to be made.

I saw the dotcom bubble, I know many millionaires, and even more former paper millionaires.
The market can be very irrational.

Look at S&W (SWBI) the P/E and book value on it are insane, why is it priced so low?
is it political risk I'm not accounting for, or are there market inefficiencies. 

I honestly think the market mispriced them, I've long since made back my initial investment. (I sold off half my portfolio the first time the share price doubled)


The logic and reality of ETFs, based on the assumption of efficient market theory is undeniable.
But we're not in a perfectly efficient market, and I think there are opportunities.


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## james4beach (Nov 15, 2012)

MrMatt said:


> The logic and reality of ETFs, based on the assumption of efficient market theory is undeniable.
> But we're not in a perfectly efficient market, and I think there are opportunities.


MrMatt while I do agree that the market isn't perfectly efficient, and index ETFs are not the only viable way to invest, I have personally known a lot of "active" investors over the years.

They generally have not done well. If I saw many successful active investors, I would think differently.

Even one of the guys I like (Dalio) is seeing investors flee his flagship Pure Alpha fund. It's been underperforming the market for 10 years now. Bridgewater was once celebrated as having some of the most successful active management decisions, but lately, they suck at it. Their decisions and trades all seem to be wrong.

Berkshire Hathaway has also underperformed the market for the last 10 years.

Dalio & Buffett may still turn out to be good active managers in the long term, but anyone who goes the active route is going to have really difficult periods like this (10 years, 15 years) where they underperform the market.


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## Fain (Oct 11, 2009)

Most fund managers will outperform their own fund in their personal accounts. I have looked at the returns of over 2-3M investors and paid close attention to PMs that also had self directed accounts. In pretty much all cases they've outformed their own Mutual fund. 

The rules and regulations that force you to have levels of liquidity and diversification etc in mutual funds will handcuff the fund managers return and ability to create alpha.


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## MrBlackhill (Jun 10, 2020)

If any believes our TSX is hard to beat... Look at this ETF which beats the TSX by simply selecting the stocks whose headquarters are in Quebec. (Proud Quebecer here)



> The Fund invests in equity securities of equity securities of issuers with a minimum float capitalization of $150 million and which are headquartered in the Province of Québec.


Sure, that's just 9 years and we're now back in sync with the benchmark, but maybe about to outperform again...!












Or what about a momentum tilt to our Canadian stocks? Beats the index again.












And for those who don't like how TSX holds the risky SHOP at the top of its holdings, maybe you should look at alternatives which will avoid the potential bubble stocks like this ETF. Obviously, since it didn't pick SHOP, it underperformed recently, but you'll notice how the FTSE RAFI Canada still has slightly beaten the TSX over 10 years.


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## Spudd (Oct 11, 2011)

The thing is, for every successful stock-picker you bring forward as an example, there's an unsuccessful stock picker who mirrors their success. If the successful one is 10% over the market returns, somewhere someone is 10% under the market returns. (OK, I know, it's not by investor per se, it's by dollars invested, but the point still stands.)

By looking at history we can see people who have successfully beaten the market. The people who were unsuccessful are harder to find because they don't publicize their results. Nonetheless, math says that they must exist. (You can see some examples on Reddit's wallstreetbets forum, LOL.)


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## MrMatt (Dec 21, 2011)

james4beach said:


> MrMatt while I do agree that the market isn't perfectly efficient, and index ETFs are not the only viable way to invest, I have personally known a lot of "active" investors over the years.
> 
> They generally have not done well. If I saw many successful active investors, I would think differently.
> 
> ...


2019 & 2015 were bad years for BRK


https://www.berkshirehathaway.com/2020ar/2020ar.pdf



But look a little bit longer and BRK starts looking better again.

I know a lot of active "investors", they're more gamblers IMO. Of course they did poorly.


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## fireseeker (Jul 24, 2017)

Speaking of alpha, a new article by Larry Swedroe suggests it is very hard to find by selecting individual stocks.



> Most common stocks do not outperform Treasury bills over their lifetimes. The research findings highlight the high degree of positive skewness (lottery-like distributions) and the riskiness found in individual stock returns. The implication is striking: while there has been a large equity risk premium available to investors, a majority of stocks have negative risk premiums. This finding demonstrates just how great the uncompensated risk is that investors who buy individual stocks (or a small number of them) accept — risks that can be diversified away without reducing expected returns.





> To be successful, investment strategies that involve concentrated portfolio positions require the ability to reliably discern between stocks where the current market price fully incorporates the firm’s future potential versus those that do not.” And the lack of persistence of performance of active managers, as evidenced in the annual S&P Active Versus Passive Scorecards (SPIVA), demonstrates that the ability to discern future winners is a scarce commodity.


h/t to ghariton at FWF


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## james4beach (Nov 15, 2012)

fireseeker said:


> Speaking of alpha, a new article by Larry Swedroe suggests it is very hard to find by selecting individual stocks.


But he simultaneously argues that one can systematically find alpha by doing "factor investing", a kind of active management (stock selection).

People like Swedroe seem to be very selective about what they call active stock-picking. Kind of splitting hairs... they believe that certain types of stock-picking is worthwhile, while other types aren't.


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## MrBlackhill (Jun 10, 2020)

fireseeker said:


> Speaking of alpha, a new article by Larry Swedroe suggests it is very hard to find by selecting individual stocks.


New article based on old news. The study was posted in 2017.

That study should be nuanced. See this article replying to that same study.



> While it is true that passive investing is a great solution for many investors, as it creates a low-cost diversified portfolio, minimizes behavioral errors, and implicitly overweight past winners (through market capitalization weighting), the results from Bessembinder’s paper aren’t an argument for market-cap-weighted passive portfolios. The Bessembinder’s paper key takeaway is that investors should *definitely buy diversified portfolios*
> 
> [...]
> 
> ...











Reconciling Individual Stock Returns and Factor Portfolio Returns


Those in the financial media have recently been writing multiple stories on a fascinating working paper, "Do Stocks Outperform Treasury Bills?" by Hendrik Bessembinder. We originally highlighted the




alphaarchitect.com





The next question would be "ok, so how many stocks do I need to have the benefits of portfolio diversification?" And the answer is between 20 and 50.


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## fireseeker (Jul 24, 2017)

MrBlackhill said:


> The Bessembinder’s paper key takeaway is that investors should *definitely buy diversified portfolios*





MrBlackhill said:


> The next question would be "ok, so how many stocks do I need to have the benefits of portfolio diversification?" And the answer is between 20 and 50.


Agree fully.

An argument was made above that the key to stock-picking outperformance is concentration. The study rebuts that.


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## Jimmy (May 19, 2017)

fireseeker said:


> Agree fully.
> 
> An argument was made above that the key to stock-picking outperformance is concentration. The study rebuts that.


No it doesn't. 20-50 stocks is concentrated. Pape's portfolio destroyed the market w just 8 so maybe 8 is all you need for diversification too.

The study is faulty too as few stocks are ever held for their lifetime. Maybe 5-10 yrs for active managers who would have dumped them well before their returns got to the level of a treasury bond.


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## MrBlackhill (Jun 10, 2020)

fireseeker said:


> An argument was made above that the key to stock-picking outperformance is concentration. The study rebuts that.


The same team who replied this to Bessembinder (same link than my previous post) also posted this note about diversification.

There's no added benefit to holding more than 50 stocks, and starting around 20 stocks is already pretty near to as good as it can get. As long as those 20 stocks are truly all uncorrelated.


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## james4beach (Nov 15, 2012)

MrBlackhill said:


> There's no added benefit to holding more than 50 stocks, and starting around 20 stocks is already pretty near to as good as it can get. As long as those 20 stocks are truly all uncorrelated.


Yeah it seems that it really doesn't take that many stocks to adequately diversify.

Even among my individual Canadian stock picks, I've got the 5 pack plus another 10 growth stocks, so those are 15 stocks spanning many sectors. I've been tracking the results for years and it really is very similar to the TSX Composite.


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