Vanguard investing options in market downturn

AlanP_2

It seems to me John W wants an approach based on published evidence whilst Prism, Linton and BananaRepublic are willing to rely on the evidence they see personally when they look at their returns and are thus happy to carry on using the same approach.

Those approaches were not made public 30 years ago and academically tested and peer reviewed. More likely they are based on experience and an analysis method that works for them. They are not trying to devise a system and market it, just doing their own thing. 

BananaRepublic

JohnWinder said:

Linton said:

JohnWinder said:

Prism said:

One thing I look for is a team of the fund manager and analysts that do their own research and do not buy the data in. That is the only way that they can ensure they are looking at things differently. An individual analyst might be able to keep track of around 5-10 companies this way so it tends to suggest funds that hold a fairly low number of stocks - high conviction. There a several examples of fund houses that I use (and some that I don't) that work this way - Fundsmith, Lindsell Train, Montanaro, Blue Whale, Baillie Gifford and Merian. 

....

Separately, I don't think we should start with: 'which funds have done better in the past; now what were their management approaches?',  and believe that that gives us as reliable information as: 'what management approaches do we think will work; now let's see how it plays out over the next 10 years?'.  Any model has to be tested, not simply developed to fit the existing data and believe that it will serve as well in the future, I think.

If one cannot use data from the past how do you propose to test alternative strategies? With any test inconvenient results could be dismissed by saying that there is no proof that there would be the same outcome under future economic circumstances.

Challenging topic. One can use past data, I just don't think it's as safe from bias as future data which one could use after proposing a strategy. After all, that's happened with the 4% SWR Trinity and Bergen ideas from the 1990's - they've been tested up to 2020.

I don’t think that identifying the 3 factors, earlier proposed, being associated with over performance is enough; they need to be contributory, and ideally in a major way. Adulthood is associated with lung cancer in a way very unlike childhood is, but it’s not adulthood that is contributory, it’s that adults smoke. Association is not always causation.

Secondly, we have the 3 factors associated with those several funds outperforming. Do other funds similarly outperform if they have the same three characteristics? We'd have more confidence knowing that.  Have any other outperforming funds beside those listed been checked for the factors? If any outperforming funds don’t have those three factors, then we’ve missed something that explains outperformance.  Have underperforming funds been checked to see if they have the factors but didn’t outperform? Has this been done on many such funds so we can have an estimate of the percentage of funds with the 3 factors that will outperform or underperform?

If the 3 factors helped us choose funds over the last 10 years, might the economic conditions and market movements be so different in the next decade that the 3 factors no longer ensure outperformance?

Wouldn’t it be better to propose a fund selection strategy, and then test it over several different ten year periods (from the one that showed us the strategy), even if they are past periods and some of them are overlapping periods eg 1990-2000, 1995-2005 etc.

Better yet, you could test the strategy going forward with future returns. It's not simple.

If there was a 95% accurate way to pick a winner, everyone and their dog would buy these funds. The funds would have to either limit access, perhaps by large fee increases, or expand and consequently lose their mojo for obvious reasons. 

I don’t see how you can have a rigorous proven method to pick active funds since the management methodologies are unknown. The empirical methods must work. If there are consistently high performing funds, they can be selected. If there aren’t, they can’t. 

I found this interesting:

https://pensioncraft.com/small-cap-vs-large-cap/

This claims that there are only two global small caps index funds, both with a heavy US weighting. In my opinion you’d be better off with a vanilla US tracker. 

An interesting fact I found is that mutual and pension funds (a US study) own about 15% of the world’s very large corporation stocks. 

Thrugelmir

AlanP_2 said:

It seems to me John W wants an approach based on published evidence whilst Prism, Linton and BananaRepublic are willing to rely on the evidence they see personally when they look at their returns and are thus happy to carry on using the same approach.

Those approaches were not made public 30 years ago and academically tested and peer reviewed. More likely they are based on experience and an analysis method that works for them. They are not trying to devise a system and market it, just doing their own thing. 

At the end of the day there's only two prices that matter the one you buy at and the one you sell at. Investing is about identifying opportunities for tomorrow. Might require some patience for an investment to become good. However gives one time to build a sizable stake. 

The problem with academic research based on historic data is that it turns into a bible for some investors. As provides a neatly packaged solution. Once many investors adopt the same path. Any advantage is lost.  As returns going forward subsequently diminish. 

JohnWinder

AlanP_2 said:

It seems to me John W wants an approach based on published evidence whilst Prism, Linton and BananaRepublic are willing to rely on the evidence they see personally when they look at their returns and are thus happy to carry on using the same approach.
Those approaches were not made public 30 years ago and academically tested and peer reviewed. More likely they are based on experience and an analysis method that works for them. They are not trying to devise a system and market it, just doing their own thing. 

Good summary that we can elaborate on. Yes, if we're talking about optimising returns for the risk taken, I want the approach you describe because it will give us the greatest confidence about the truth of its conclusions, as well as the greatest precision about the size of the difference in returns between different approaches.

Of course, we have to accept a less than an ideal approach, and I don't mind what approach others accept.

Related, a large proportion of readers come to learn or be advised. We're all trying to help, but care is needed to avoid giving misguidance as some questioners are so naive that being directed unintentionally is too easy, including mis-directed. And this forum has one benefit over only using an advisor in that any idea tossed up can be challenged.

One of the big issues is active/passive. Consider these extracts from the forum, without wishing to single any people out:

'Why a FTSE250 tracker when UK small and mid cap has a range of very good managed funds to consider?'   The possible implication is 'active is a good choice'

'In other parts of the world active fund hands on management is potentially worthwhile.' Same possible implication.

'One of the issues that the passive biased investors often have is they assume ALL managed funds are bad and it's not possible to filter out the poor quality funds.' Possible implication: it is possible, folk can do so you could, and all you'd be left with is something that is a decent alternative.

'Most countries do not have very good active funds but the UK does tend to buck the trend.' Same.

'A popular method in the UK is the hybrid of both active and passive.' It's popular so it should be a good choice, after all it's not one-sided.

'Throws out the window all the claims about efficient market pricing when it comes to passive investing.' Possible implication is that the theoretical basis for passive is discredited.

We may think it's not ideal to allow people to walk away with the wrong idea, so we can put up a challenge.

Thirdly, we don't want, or I don't, to waste too much more time and space on active/passive, particularly if it doesn't help reconcile the different views. So I feel like contributing to the best arguments on all sides for the naive new investors to evaluate for a rational decision about how they'll proceed. Surely that does them the least disservice.

I accept that folk may not be trying to market their approach, but when people with tens of thousands of posts, repeated 'thumbs ups' and talk sense include something that they don't recognise might mislead, a challenge is ok I think.

JohnWinder

Thrugelmir said:

The problem with academic research based on historic data is that it turns into a bible for some investors. As provides a neatly packaged solution. Once many investors adopt the same path. Any advantage is lost.  As returns going forward subsequently diminish. 

And here we go....

If we're talking about research supporting index fund investing that has turned into the gospel of saint Jack religiously followed by some investors, then I'd suggest that no matter how many investors have followed that path no advantage has been lost and no returns diminished. Price discovery has been maintained by the non-index investors, so no persistent mis-pricing can occur. Returns depend on the profitability of the underlying businesses; they don't distinguish from whom they get their funding. In fact, by more people following this path the fees for all managed funds, active or passive, have been driven down to the advantage of all investors. Bring it on.

Thrugelmir

JohnWinder said:

Thrugelmir said:

The problem with academic research based on historic data is that it turns into a bible for some investors. As provides a neatly packaged solution. Once many investors adopt the same path. Any advantage is lost.  As returns going forward subsequently diminish. 

And here we go....

If we're talking about research supporting index fund investing that has turned into the gospel of saint Jack religiously followed by some investors, then I'd suggest that no matter how many investors have followed that path no advantage has been lost and no returns diminished. Price discovery has been maintained by the non-index investors, so no persistent mis-pricing can occur. Returns depend on the profitability of the underlying businesses; they don't distinguish from whom they get their funding. In fact, by more people following this path the fees for all managed funds, active or passive, have been driven down to the advantage of all investors. Bring it on.

Actually I wasn't. 

Linton

AlanP_2 said:

It seems to me John W wants an approach based on published evidence whilst Prism, Linton and BananaRepublic are willing to rely on the evidence they see personally when they look at their returns and are thus happy to carry on using the same approach.

Those approaches were not made public 30 years ago and academically tested and peer reviewed. More likely they are based on experience and an analysis method that works for them. They are not trying to devise a system and market it, just doing their own thing. 

There is more to it than that.  My argument is with those who believe that the approach they favour is optimal for all investors at all times in all circumstances and that there is unassailable evidence which proves this.  Having seen The Truth it is obviously their duty to promote it as widely as possible and to show that any views to the contrary are falacious.

My belief is that every investor with life-changing amounts of money to manage needs to seek their own salvation and evolve a way of handling risk and uncertainty that lets them sleep at night. There is no single right answer.  It is therefore important that a wide range of approaches are discussed to give people trying to meet that challenge an understanding of what is possible..