/biz/ - Business & Finance

[Anonymous No.822045]

>he doesn't buy and hold

[Anonymous No.822297]

>>822045
>there's people in AD MMXV who don't buy and hold.
>there's people who pay for actively managed funds
>there's people who gamble and call it investing
>there's people that "invest" in bitcoin

It's an amusing world right here.

[Anonymous No.822875]

>>822297
nothing but fools

[Anonymous No.822961]

>>822297
My bad
>there are* people that...

[Anonymous No.822966]

>>822045
>buy and hold
>50-70 years later
>collect

[Anonymous No.822970]

>>822297

I'm curious though. I know about 20% of the active funds beat passive investing but that's mainly because the 80% usually have a ton of fees... I'd like to know how many of those without fees would beat the index.

I'm personally for 85% passive, 5% bonds, and 10% personal picks (or 15% personal). I still get the "rush" out of picking companies while keeping myself protected from getting greedy or emotional with my investments.

[iHaz !MILLiOnz/Q No.822993]

>>822970
>I'd like to know how many of those without fees would beat the index.
According to Fama and French (two of the most influential modern market researchers), fewer than 16% of funds have alpha (performance above the market) greater than 1.25% per year (the minimum statistically significant quantum), and only about 2.3% have alpha greater than 2.50% per year, in each case BEFORE fund expenses and fees.

The study further found that when you account for fees and expenses, the numbers get really bleak. Something like 98-99% of funds fail to beat the markets on a consistent basis. This is even more damning that the "80%" figure that came out of earlier research because Fama and French adjusted for manager luck over the testing period.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1356021

[Anonymous No.823017]

>>822993
So, for those of us who only have the faintest idea what this is about, this is an indictment of managed funds versus indexed funds?

[iHaz !MILLiOnz/Q No.823052]

>>823017
>So, for those of us who only have the faintest idea what this is about, this is an indictment of managed funds versus indexed funds?
Yes, this is an incredibly damning indictment of active management from two of the smartest researchers in the field (including a Nobel prize winner).

The study finds that "most if not all active funds" have a /negative/ net alpha for investors over the long-term after accounting for fees and expenses.

To put it in my own words, the study says that when you take luck out of the equation, active fund managers don't beat the market. So the whole concept of "skill" in stock picking is bullshit.

[Anonymous No.823053]

>>822993
I always hear about these figures and that's why I do passive investing, but I wonder if they apply to emerging markets too.

I live in a small country where the local stock index goes sideways most of the time, and it seems like active mutual funds overperform the passive ETF a lot, even with 3,59% annual fees.

[Anonymous No.823078]

>>823053
>and it seems like active mutual funds overperform the passive ETF a lot, even with 3,59% annual fees.

Usually those are the top 20% of MF that make it out of the incubator stage and milk their track record for 5-10 years until the market catches up to them and they are closed down.

[iHaz !MILLiOnz/Q No.823088]

>>823053
>I wonder if they apply to emerging markets too
I can't speak to the specifics of your country, but the available evidence says that the oft-repeated claim that active-management outperforms in marginally inefficient markets -- such as emerging markets -- is probably a myth.

http://www.etf.com/sections/index-investor-corner/swedroe-mythical-emerging-market-returns?nopaging=1

To be clear, I'm not completely against active management. I have about 30% of my portfolio in actively managed funds -- but they're /very/ low-fee funds with incredibly well-respected managers like PRIMECAP and Wellington. A fund with a 3.59% fee would never, ever be in my portfolio, period.

https://personal.vanguard.com/pdf/s356.pdf

[Anonymous No.823100]

[Anonymous No.823234]

>>822993

How do you feel about dividend growth investing? I've seen a lot of buzz recently that it is the answer to beating the s&p 500/market. However, most of them only look at the past 10-15 years which I don't think is enough time. Have you read about any research on that?

Also are you familiar with James OShaunessy? He formulated a plan in that you'd take the top 20 stocks (percentile based) based on P/E, P/B, P/FCF, Dividend + buybacks, P/S, and EV/EBITDA. They back tested it and found ~20% average return. He has a book on it, What Works on Wall Street. I'm about to read that after hearing about that plan.

[Anonymous No.823237]

>>823234

Also after a year they'd sell the stocks and then pick the next 20 to reduce taxes.

[Anonymous No.823306]

>>823234
>How do you feel about dividend growth investing?
Sometimes dividend stocks are good. Sometimes they're not (including recently). I don't think they deserve any larger representation in a well-diversified portfolio than any other asset category. And I think the evidence backs me up on that.

Also, dividend stocks are notoriously tax-inefficient. Lots of people come to /biz/ touting dividend stocks don't even realize the adverse tax consequences. Personally, I own over a half million of VDADX ... but only in my nice, cozy tax advantaged IRA.

If you look hard enough, you can make a case for anything if you turn a blind eye to the bad data. I suspect that that your author does this, but I haven't read the book. In my experience, people who claim to have discovered systems or trading strategies to "beat the market" are good at marketing and bad at investing.

[Anonymous No.823314]

>>823306

Why do you keep changing your ID and taking your trip off?

>inb4 not ihaz

Stop being a nigger

[iHaz !MILLiOnz/Q No.823326]

>>823314
>Why do you keep changing your ID and taking your trip off?
>Stop being a nigger

I haven't changed my ID once.

I guess I forgot to use my trip last post. Does that really bother you so much?

Why are you so angry? We're having a nice little thread here.

[Anonymous No.823331]

>>823088
The specific country is Chile. Here all stock mutual funds have fees close to 3,5%, even higher for funds that invest in international markets. There is only one (relatively new) passive ETF, with lower fees. It tracks the local "IPSA" index. In the picture you'll see the active mutual fund I was talking about, surpassing the IPSA index below it. I'm sticking with the passive ETF because I know that in theory that's the right way to go, but can't avoid feeling that I'm losing on something when I see the charts.

To avoid the high fees of mutual funds here, I end up doing most of my investing directly with international brokers in the US (on low-fee ETFs for the S&P etc.), but still end up losing a bit of money per-transaction because of the conversions to US dollar, money transfers, and commissions.

[Anonymous No.823343]

>>823331
jesus fuck that's horrible
how big of a % does trading commission, transfer fees and currency conversions are costing you?

Also, in Chile, is there a way to perform Norbert's Gambit or is that strictly a Canadian thing?
http://www.moneysense.ca/invest/norberts-gambit-a-better-way-to-buy-u-s-dollars/

[Anonymous No.823345]

>>822993
>Fama and French
>The retards responsible for efficient market hypothesis being a thing

no thanks

[Anonymous No.823353]

>>823343
The commission + transfer ends up being 1,785% per transaction. The conversion part is a bit harder to estimate, because of currency fluctuations.

Still I believe it's better than having 5% annual fees eating at my mutual funds all year long (if I invested in the S&P using a local mutual fund).

I'll read that gambit thing, let's see...

[iHaz !MILLiOnz/Q No.823354]

>>823331
I sympathize anon. One of the first things I learned when /biz/ started last year is how hard it is to implement a simple low-cost index strategy in some countries. Keep doing the best you can with the options available.

Good luck with your plan.

[Anonymous No.823374]

>>823234
Dividend growth investing only works insofar as dividend growth stocks are proxies for high quality businesses better than the average business represented in the stock market. It's disproportionately these kinds of businesses that are able to raise their dividends year after year because of strong, enduring competitive advantages, strong brands, consistent profit margins, and high returns on investment.

Look up the Nifty Fifty sometime. It was a bubble involving a group of high-quality blue chip stocks (not necessarily DGI) that went up to insane dot-com level valuations in the late 60s because everyone thought you couldn't lose investing in quality. The funny thing is, even after they crashed, the Nifty Fifty still went on to outperform the market as a whole measured from the peak after a few decades passed, in large part thanks to Philip Morris, because the economics of their businesses were just that strong.

The danger in going DGI is, as with all active strategies, stock selection and long periods of relative underperformance. These stocks tend to underperform in bull markets and get their long-term outperformance in bear markets. If you were really paranoid you could just play it safe with the bluest of blue chips (stuff like PG, JNJ, UL), the kinds of businesses that are indestructible supranational organisms, collect the dividends, and sleep well at night.

[Anonymous No.823426]

>>823306
>dividend stocks are notoriously tax-inefficient
Why are they any worse or better than non-dividend stocks? If they're American companies don't the dividends get charged at the capital gains rate after you've held them for 1 year (or whatever the time period is)?

[Anonymous No.823432]

>>823426
this is not what you're asking, but for other international anons I must point out that the US taxes 30% of dividends for non-resident foreign investors.

[iHaz !MILLiOnz/Q No.823462]

>>823426
>Why are they any worse or better than non-dividend stocks?
Consider two equivalent stocks -- a growth stock (Stock G) and a high-dividend stock (Stock D) -- both of which yield 10% per year. Stock G earns its 10% by price accumulation, and Stock D earns its 10% by paying a cash dividend. You own 1 share of each, and they are both worth $100/share. At the start, therefore, both Stock G and Stock D are worth $100.

At the end of 1 year, Stock G is now worth $110 (10% growth) and Stock D is still worth $100 but has paid you a $10 dividend. Your return on both stocks is the same -- before taxes.

After taxes, however, Stock G is still worth $110 (no tax consequences) but Stock D has only returned you $108 because you paid 20% in capital gains taxes on the dividends. So Stock G is ahead by $2.

Let's assume you're smart and re-invest your dividends. After year two, Stock G is now worth $121, and stock G is still worth $108 but has paid you a $10.80 dividend, reduced by taxes to $8.64, for a total gain of $116.64. Stock G is now ahead by $4.36

Hopefully you can now see where this is going. Every year the spread between Stock G and Stock D is going to get wider and wider because taxes aren't depleting any of your Stock G capital.

Lastly, while its true that Stock G will have higher accumulated gain (and corresponding taxes) than Stock D later in life, taxes later are almost always better than taxes now. Why? Because the earning potential of capital compounded over many years is always going to exceed increases (if any) in the capital gains tax rate unless things change wildly under the US tax system.

>Hopefully that was clear. I've been drinking.

[iHaz !MILLiOnz/Q No.823463]

>>823426
>Why are they any worse or better than non-dividend stocks?
Consider two equivalent stocks -- a growth stock (Stock G) and a high-dividend stock (Stock D) -- both of which yield 10% per year. Stock G earns its 10% by price accumulation, and Stock D earns its 10% by paying a cash dividend. You own 1 share of each, and they are both worth $100/share. At the start, therefore, both Stock G and Stock D are worth $100.

At the end of 1 year, Stock G is now worth $110 (10% growth) and Stock D is still worth $100 but has paid you a $10 dividend. Your return on both stocks is the same -- before taxes.

After taxes, however, Stock G is still worth $110 (no tax consequences) but Stock D has only returned you $108 because you paid 20% in capital gains taxes on the dividends. So Stock G is ahead by $2.

Let's assume you're smart and re-invest your dividends. After year two, Stock G is now worth $121, and stock D is still worth $108 but has paid you a $10.80 dividend, reduced by taxes to $8.64, for a total gain of $116.64. Stock G is now ahead by $4.36

Hopefully you can now see where this is going. Every year the spread between Stock G and Stock D is going to get wider and wider because taxes aren't depleting any of your Stock G capital.

Lastly, while its true that Stock G will have higher accumulated gain (and corresponding taxes) than Stock D later in life, taxes later are almost always better than taxes now. Why? Because the earning potential of capital compounded over many years is always going to exceed increases (if any) in the capital gains tax rate unless things change wildly under the US tax system.

>Hopefully that was clear. I've been drinking.

[Anonymous No.823547]

>>823234
Dividend growth investing (you've been sniffing around seeking alpha.com i suspect) is for retirees who insist on doing things themselves. With enough starting capital, anyone can generate income, but dividend growth investing will never beat the S&P 500.

Dividend growth investors favor large cap value stocks; especially consumer staples. You are jamming all your capital into one or two asset classes. Some years certain asset classes out perform, sometimes they underperform. If you aggregated 100 dividend growth portfolios, returns would be similar to large cap value returns.

Returns come from two sources; allocation (selecting asset classes) and selection (selecting securities within the asset classes). The majority of returns are driven by allocation; not selection. Selection is the hardest part; picking KO or PEP, selecting RAI or MO.

So you are telling me DIY investors will outperform the markets by selecting securities from one or two asset classes?

[Anonymous No.823763]

>>823463
Okay, I see your point there. But, for you to realize any gains with G, you have to sell it. At that point you stop making any gains at all. If you're looking to building capital, growth is better than dividend. But if you're looking to replace income, there's no way a growth company could be a better investment than a high-dividend company, assuming we leave out outliers like Tesla or Netflix from the past couple of years (where they exploded).

[Anonymous No.823784]

>>823763
Unless you are retired or the beneficiary of a trust fund, why do you care about a few dollars of passive income? Your human capital will generate far more income than your investment capital.

Anyone under the age of 40 with less than a million dollar portfolio is kidding themselves if they think a portfolio of dividend paying stocks will allow them to retire early and live off dividends.

[iHaz !MILLiOnz/Q No.824192]

>>823763
>for you to realize any gains with G, you have to sell it
And for you to realize any gains with D, you have to NOT re-invest your dividends, which makes the spread between G and D even wider.

Besides, as >>823784 mentions, there's very little need to discuss the construction of an income generating portfolio amongst an audience who should be focused on growth. Other than myself, I don't think there's many retirees (early or otherwise) on this board.

[Anonymous No.824195]

>>824192
I thought you were still doing the half-million-a-year 2ez corporate lawyer thing? Did you finally stop wasting your life on that trash and quit working?

[Anonymous No.824202]

>>822045
>He's only going to live for another 50-60 years
>He doesn't want to be the richest man in the cemetery

[iHaz !MILLiOnz/Q No.824208]

>>824195
Yeah, I pretty much retired last year. I still have my license, but I haven't done any client-billable work at all in 2015.

[Anonymous No.824488]

>>824208
I haven't noticed a huge increase of shitposting from you, so you must be occupying your time with something... What, like, productive? That's gay.

[Anonymous No.824514]

>>823052
Could you brief me on how he quantified luck?

[iHaz !MILLiOnz/Q No.824524]

>>824488
If I start filling my extra free time with 4chan, please put a bullet in my head.

>>824514
>Could you brief me on how he quantified luck?
I don't have a math or statistics background, so I'll admit that I'm not qualified to discuss the methodology. I'll leave that to the experts.

The authors themselves explain it as follows:

>The challenge is to distinguish skill from luck. Given the multitude of funds, many have extreme returns by chance. A common approach to this problem is to test for persistence in fund returns, that is, whether past winners continue to produce high returns and losers continue to underperform (for example, Grinblatt and Titman (1992), Carhart (1997)). Persistence tests have an important weakness. They rank funds on short-term past performance, so there may be little evidence of persistence because the allocation of funds to winner and loser portfolios is largely based on noise.

>We take a different tack. We use long histories of individual fund returns and bootstrap simulations of return histories to infer the existence of superior and inferior funds. We compare the actual cross-section of fund α estimates to the results from 10,000 bootstrap simulations of the cross-section. The returns of the funds in a simulation run have the properties of actual fund returns, except we set true α to zero in the return population from which simulation samples are drawn. The simulations thus describe the distribution of α estimates when there is no abnormal performance in fund returns. Comparing the distribution of α estimates from the simulations to the cross-section of α estimates for actual fund returns allows us to draw inferences about the existence of skilled managers.

I believe the ELI5 summary would be that they compared the actual results of fund managers to a random picks over meaningful periods of time. Not unlike like the old WSJ contest pitting professionals against stocks picked from a dart board, but in a more scientific manner.