Share Dealing Discussion Area

Aegis

THENOX wrote: »

High!.:-)

"You need to watch how you use statistics..." I think that I'm quite fine with my statistics cause even based on your example I can ask whether this amount of difference is significant and even when it is where it comes from (skill or just a luck of coming on top of the distribution bell curve)...

The reason I stated this is that it looked to me as though you were trying to take some large-sample statistics and reduce them down to a single case. The problem is that it doesn't work like that. As an example, looking at your comment about ETFs, you used the word "guarantees". In statistics there are almost no guarantees, it's the very nature of probability that anything with a non-integer probability is absolutely not guaranteed to either happen or not happen, but could go either way.

Anyway, more of a pure mathematician's perspective there!

"There's no academic proof that the benefit of speculation is going to be zero for any given case." -not for any given case but that the positive results are not significant (due to random chance therefore omittable). - I've seen it as a secondary source but the reference is to primary academic paper if you want I can dig it and paste link here.

Personally I'm of the opinion that the good speculators rely on anything but chance. The ones who aren't much good might pick a AIM-listed company that's fallen on hard times and will throw cash at it to see what happens, while a thorough speculator will identify a handful of smaller companies with large potential for growth, will analyse the risks those companies face, will understand the decisions that the board must make and will make their investment decisions based on all those facts. Along with them, the few who get lucky are winners, and it's likely that the large majority of left-overs lose fairly substantially.

In short, I think that speculation can work very well for the well informed, and very poorly for the poorly-informed. With a hint of added randomness, of course.

"The likelihood is that in a sample of, say, 1000, 800 lose money, 150 more or less break even and 50 earn quite a bit (including the few that really know what they're doing)." - so I can even let off statistics argument as even from your example it can be seen that this is a game where most of them loose, some will by miracle break even (miracle as after all that risk they didn't earn anything so lost: time, effort, stress, interest from bank account and a real buying power through inflation)

Oh, no argument from me. Speculation is a game that I think the majority of people would lose at compared to collective investing, my only disagreement here was that it's not going to be a benefit of zero: it's far more likely to be negative than zero!

"Most people don't go beyond picking a company they've heard a couple of good things about, and hence lose out." - that's why someone who doesn't know whether he is in the top 30% probably isn't therefore is far better off with a tracker.

Better off than speculation, perhaps. However, I think with a little research that same person would do better with a managed fund in most sectors.

"An ETF guarantees no such thing." -why do you claim that index etf doesn't guarantee you market average (minus tracking error -that's obviously life as tracker is synthetic) as compared with particular stock from that index?

Because when people say "investors" I tend to think of people rather than, say, pension funds, which invest heavily in a lot of stocks that don't always do particularly well. Yes, it eventually drives back to private investors in the end, but companies investing, say, their final salary pension pots can do a lot worse than defined contribution pension plans in terms of performance simply because companies have to take fewer risks with the final salary option.

Not to mention the fact that picking an ETF only guarantees you the absolute average in that sector, not necessarily compared to other investors. For example, if you had invested in a FTSE 100 tracker 10 years ago, you'd be doing worse than the vast majority of private investors by now because the FTSE 100 has been a very poor performer compared with the FTSE AllShare.

"If you buy an ETF index tracker you will probably do better than most of the investors in bank managed funds, but will probably do worse than most of the investors in dedicated investment house managed funds." - not really as this data is not adjusted for risk (standard deviation of returns) (they took much more risk drifting therefore it seems like they've beat the benchmark but it's only because the benchmark is not relevant anymore as it doesn't match for SD therefore can't be compared)

No, they don't match with standard deviation. The tracker funds fluctuate MORE than the good managed funds in this sort of time because the good managed funds have downside protection that simply doesn't exist in trackers. The comparison is valid between managed and passive funds, in which case you could compare the alpha values for the various funds compared with the appropriate index to see a risk-adjusted performance measure for each type of fund. I would happily bet £10 of my own money that the risk-adjusted performance for index trackers tends to be lower than the funds managed by reputable investment houses in the same sector.

"but will probably do worse than most of the investors in dedicated investment house managed funds" -Fama said somethig like this one day: "There's no evidence managers can beat markets; if there was, then somebody would find it" (they try very hard -is it fair enough or one needs a academic paper showing that most of them don't consistently outperform on even pre-cost basis?). Aactually Fama and French model that explains 96% of market returns (toped up Shwabs model/Nobel) (market risk + value [the worse the better = more risk more reward] + company size [the tinier the better = more risk more reward]) leaves no much room for alpha: stock/manager picking or market timing (half of that 4% left is probably noise or error as well). There was a good paper called: is your alpha big enough to cover it's taxes (it's for US where tax laws are a bit mad but still paper makes brilliant points about funny size ov alpha as compared to expanses and risk ov obtaining it).

The US is a strange economy, and is a totally different beast from the UK one. As I've said elsewhere, it seems that in the US the idea that trackers are better than most managed funds tends to be true, but in this country and in a lot of, for example, developing markets, it just isn't the case. A lot of people make the same mistake you just did: taking US investment strategies and assuming that they also apply to the UK. In general they might, but not in this particular case.

"In the UK managed (excluding bank) funds generally outperform the index pretty much every year even if you pick one good managed fund from an index" -are that two vehicles really adjusted for the amount of risk (standard deviation of returns?).

Yes. Good managed funds are lower risk due to the downside protection, as I already mentioned.

"almost at random." -so do I need to be lucky to pick this good managed fund or I need to have a skill to pick a manager IN ADVANCE? On what basis I am to be so lucky to score one from the top 33% if past performance (day to day, month to month, year to your, 5y to 5y) correlation is about 0.006? (why watchdogs require disclaimer: 'past performance is not a predictor of future one' under every graph: -cause it's plain and brutal truth!)

Past correlation is not 0.006 (certainly not in all of those cases you mentioned, as it would be impossible to be 0.006 SRCC between days AND years). Certainly not in the UK. Look at the top 10 performers eahc year for the last 10 years or so and you'll see consistency year on year. For example, in the UK Equity Income sector, Invesco Perpetual have been in the top 10 performers pretty much every year as far as I can tell. Jupiter have generally been up there too, but have recently lost their edge. With a little background research you can see which fund managers truly add value for their investors, and you can keep an eye out to make sure they don't start losing it.

"If you actually pick one of the better fund managers, then you have a much greater chance of beating an index tracker, including the effects of charging." -if I am after more risk (set amount lets say: SD 20) I will just calculate standard deviation of results for active one and just choose different index tracker with that standard deviation (probably it will be more of a small, microcap or value [distressed companies with funny btm values or messed up dividends however you measure it] and I can be quite safe to say that adjusted for standard deviation (risk) my hardcore index tracker will produce higher returns over time by the fees and trading costs alone not to mention being properly risk/opportunity exposed...

As mentioned already, index trackers are generally higher risk than managed funds and should therefore perform BETTER than all of them to be considered even equal in terms of risk-adjusted performance.

BTW: would you be able to tell me how do I quote fragments of smbs posts (like you did) as I'm a newbie on this forum? It is quite confusing to do it like I had to do it in this reply and it looks like a plagiarism as well...

No proble, just type [ QUOTE ] without the spaces at the start of the quote, and [ /QUOTE ] without spaces at the end. Should look nice.

THENOX

"You need to watch how you use statistics..." I think that I'm quite fine with my statistics cause even based on your example I can ask whether this amount of difference is significant and even when it is where it comes from (skill or just a luck of coming on top of the distribution bell curve)...

The reason I stated this is that it looked to me as though you were trying to take some large-sample statistics and reduce them down to a single case. The problem is that it doesn't work like that.

-yeah I know that this can't be done going down due to type 1 & 2 Statistical Error tradeoff.

As an example, looking at your comment about ETFs, you used the word "guarantees". In statistics there are almost no guarantees, it's the very nature of probability that anything with a non-integer probability is absolutely not guaranteed to either happen or not happen, but could go either way.

I admit that the word guarantees was really dumb in terms of speaking about investments and any future outcome in general as it's all probabilistic reasoning kinda thing but can't really agree whether in this particular case we can really apply purely statistical reasoning: lets say: FTSE100 100 companies by market cap, index their average (50 grabbing down, 50 up) going for an index tracker you land in the middle (pre cost) so automatically done better than holders of 50% companies.

Personally I'm of the opinion that the good speculators rely on anything but chance.

so you agree that they literally bet on future outcomes therefore are gamblers (term doesn't sound too cool but everyone who has a vision of future outcomes while buying any stock [either fundamental or technical vision] is a speculator -isn't it like that?)

"Along with them, the few who get lucky are winners, and it's likely that the large majority of left-overs lose fairly substantially." -if you agree with broadening the term from speculators to share traders it will mean that investors (or fund managers on their behalf) are playing loser's game with or without market protection (deending on your view on EFT). I agree that most of them will loose for someone to win the gathered loses ov the majority (sth a bit like a National Lottery: we all buy tickets the company collects it, pockets the half of it and then organizes a huge prize for the lucky one!).

"In short, I think that speculation can work very well for the well informed, and very poorly for the poorly-informed. With a hint of added randomness, of course." - hundred percent agree: when one doesn't know what one is doing then better not to do anything... Arguing my case: or sit back and chill out taking an average of their efforts.

Quote: "Most people don't go beyond picking a company they've heard a couple of good things about, and hence lose out." - that's why someone who doesn't know whether he is in the top 30% probably isn't therefore is far better off with a tracker.
Better off than speculation, perhaps. However, I think with a little research that same person would do better with a managed fund in most sectors.

-could you argue this one further (explaining why) my question is: how this works if managers literally bet on future outcomes (read: speculate) in your name with your money. Manager picking is a form of speculation as well -isn't it? -you bet that this guy will outperform the market (will end up in the top 30%) of similar to him playing against him? -This one is like betting on horses/jockey -you acknowledge that you are not capable (fair enough) but hope that they are... Obviously asuming that they are not ringing their mates up in the companies themselves getting hold of insider info -if they do (high scale) just let me know I will straight away open myself to these new opportunities :rolleyes:.

Going back to Fama & French model of stock returns: are you able to refer me to some alternative as if we accept that source of return is: market risk + small value + small size than there is literally no space for anything else (apart from statistical error )

Quote:
"An ETF guarantees no such thing." -why do you claim that index etf doesn't guarantee you market average (minus tracking error -that's obviously life as tracker is synthetic) as compared with particular stock from that index?
Because when people say "investors" I tend to think of people rather than, say, pension funds, which invest heavily in a lot of stocks that don't always do particularly well. Yes, it eventually drives back to private investors in the end, but companies investing, say, their final salary pension pots can do a lot worse than defined contribution pension plans in terms of performance simply because companies have to take fewer risks with the final salary option.

don't get this argument at all, please explain (my one is in metaquote) -I hope that you didn't pick up on my wording:market average (meaning index average ) I still can retreat to the caves ov FTSE All Share tracker and stay cool there (nearly total market average).

Not to mention the fact that picking an ETF only guarantees you the absolute average in that sector, not necessarily compared to other investors. For example, if you had invested in a FTSE 100 tracker 10 years ago, you'd be doing worse than the vast majority of private investors by now because the FTSE 100 has been a very poor performer compared with the FTSE AllShare.

-oh yeah here it is, that's fair enough (personally think the broader you get the closer you get to the total market average). BTW: yeah you've picked on my wording

Quote:
"If you buy an ETF index tracker you will probably do better than most of the investors in bank managed funds, but will probably do worse than most of the investors in dedicated investment house managed funds." - not really as this data is not adjusted for risk (standard deviation of returns) (they took much more risk drifting therefore it seems like they've beat the benchmark but it's only because the benchmark is not relevant anymore as it doesn't match for SD therefore can't be compared)

No, they don't match with standard deviation. The tracker funds fluctuate MORE than the good managed funds in this sort of time because the good managed funds have downside protection that simply doesn't exist in trackers. The comparison is valid between managed and passive funds, in which case you could compare the alpha values for the various funds compared with the appropriate index to see a risk-adjusted performance measure for each type of fund. I would happily bet £10 of my own money that the risk-adjusted performance for index trackers tends to be lower than the funds managed by reputable investment houses in the same sector.

-That's a good very good argument (completely forgot about it as seen it only for a sec 3 mo somewhere)so it works like a mirror image of a classic PAR? -but everything has it's price -please tell honestly what is the price (as far as I reckon: losses still above the threshold are multiplied but when it will really plunge they are capped?). -if yes doesn't it average to zero -their costs of using it?


"The US is a strange economy, and is a totally different beast from the UK one." -I don't claim that UK and US are the same but this statement is a bit like claiming that gravity doesn't apply in e.g. Kenya cause it is really different country and really far away. Do you claim that there are different basic principles here and there? Risk reward tradeoff, market efficiency (or zero sum game if not), no patterns or momentum (or same patterns same momentum), equations, formulas, etc etc.

As I've said elsewhere, it seems that in the US the idea that trackers are better than most managed funds tends to be true

-numerous studies from all over the world tend to report managers inconsistency

but in this country and in a lot of, for example, developing markets, it just isn't the case."

I am really interested what is the difference? Don't our best friends from the City take care about right pricing of assets for us by 27/7 mini bargain hunting.

A lot of people make the same mistake you just did: taking US investment strategies and assuming that they also apply to the UK. In general they might, but not in this particular case.

it's not an investment strategy but benefiting form academic systematic and unbiased research into basic principles. As long as market is free (I don't talk N.Korea as in this country my savings will be denominated in kilograms of rice :eek:) it is more or less efficient (works without interventions) lets assume that really less: once them geeks spot some undervalued stock they place huge trades on it and the price goes back i n literally a sec to the place whee it should be blocking the next trade from being profitable (even then executed :mad:) -I agree that this is an argument for your side as well and I'm really happy to acknowledge it. But the question is: how significant that unspoiled by risk bargain can be, how usual this phenomenon is and is it really worth to pay 1,58% expense ratio per year for it where the tracker would cost from 0,21% per year and will often ;)outscore 50%+ investors.

Past correlation is not 0.006 (certainly not in all of those cases you mentioned, as it would be impossible to be 0.006 SRCC between days AND years).

-what I've done was eyeballed the values and took an eyeballed mean meanin that the final value is negligibly small -nothing wrong with that (although admittedly rough ) as long as whatever value will still stay within non significance range...

Certainly not in the UK. Look at the top 10 performers eahc year for the last 10 years or so and you'll see consistency year on year. For example, in the UK Equity Income sector, Invesco Perpetual have been in the top 10 performers pretty much every year as far as I can tell."

so if we read and acknowledge the small print (past performance is not a guide for future performance) (Martin would tell us always to read the small print :T) how useful it really is now to make investment decisions? -is it good to buy such a successful one now (really lets roughly call it inflated) and risk running it down (can it go up and up forever when gravity of an index average increases) and then sell it in grief ? Isn't it good to buy sth low and risky and sell it high and safe?

With a little background research you can see which fund managers truly add value for their investors, and you can keep an eye out to make sure they don't start losing it.

-which model of expected market returns are you using that supports this claim? For me it looks more like looking only on the extreme right part of a past distribution curve and judging from that...

As mentioned already, index trackers are generally higher risk than managed funds and should therefore perform BETTER than all of them to be considered even equal in terms of risk-adjusted performance.

very intelligent and intellectually entertaining statement as a bit of a paradox in it's own right :cool: -but quite casuistic as problem is that using hard core casino logic it doesn't really sound that betting on certain numbers is less risky than owning all the outcomes and taking average think that this is why the casinos and spread betting houses still exist: no matter what happen they will always win by taking the average of all outcomes being in their favour. This rule also applies to index trackers.

Cheers 4 tellin me how to quote properly now it looks much better (and not plagiaristic )!

Really appreciate your stimulating input and enjoy this disscussion!

-Any thoughts?


THE NOX

PS: too long to proof read it so please don't pick up on my wording (been doing my best in this first draft :A)

PS PS: Are you sure there is no more convenient way for quoting (like from a button?) this one seems really manual

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In investing what is comfortable is rarely profitable.
Robert Amott

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cheerfulcat

Are you sure there is no more convenient way for quoting (like from a button?) this one seems really manual

Copy and paste what you want to quote, highlight it and use the "speech bubble" button on the task bar in the message window.

THENOX

Copy and paste what you want to quote, highlight it and use the "speech bubble" button on the task bar in the message window.

Wicked! Thanks! I'm really blind! :mad:

Jake'sGran

EdInvestor wrote: »

Wednesday is the day shares usually go ex-dividend, so that may be a good day to buy, as prices usually fall when this happens.\

On the other hand, if you were counting on getting the divi, be sure to buy before the ex-div date.

Hello Ed

Just realised, you have answered my question. I wanted to know if one had to be a share holder for a specific number of weeks/months before being entitled to a dividend. Lloyds TSB go ex dividend on 6th August so, in view of your last sentence, I will get it if I buy now. I have decided to start buying shares. Considering I already have quite a few shares you'd think I would have known the answer to this question but some of them were free (and have taken a great tumble) but others have done very well indeed like BG.

Aegis

Others are offering £35 on top of the standard £50, and this isn't the thread for soliciting invites, so you might want to drop in to the referrals forum.

THENOX

Aegis, not seeing your reply to my post for some reason (I'm sorry I really shouldn't take a mean of Spearman's coefficients ) I'd like to only ask you to clarify the downside of PARing in actively managed funds as I'm sure that they also involve betting on the future direction of a market.

Cheers,

THE NOX

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Eat, Sleep, Think..: Investments!

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Aegis

THENOX wrote: »

Aegis, not seeing your reply to my post for some reason (I'm sorry I really shouldn't take a mean of Spearman's coefficients ) I'd like to only ask you to clarify the downside of PARing in actively managed funds as I'm sure that they also involve betting on the future direction of a market.

Cheers,

THE NOX

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Eat, Sleep, Think..: Investments!

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Sorry, what are you asking for exactly?

THENOX

to comment on disadvantages of PARing as written in the previous post:

I'd like to only ask you to clarify the downside of PARing in actively managed funds as I'm sure that they also involve betting on the future direction of a market.

Thanks,

THE NOX

Aegis

I know you're asking about Price Adjusted Risk, but I'm not sure which particular bit of information you'd like me to clarify. Could you be a bit more specific about what you want to know, as it's been a while since our other chat about this and my mind has had plenty of other things to deal with since then!