Timing the market

MarkCarnage

Deleted_User said:

JohnWinder said:

There has been various work showing that in practice owning a relatively small number of stocks (up to 30 or at most 50) will provide c90% of diversification benefit....however that is only against that particular universe benchmark within equities.

I'd be interested to see that research, firstly to learn how one quantifies the benefit of diversification but also to see how it stacks up against Bernstein's assertion that 50 stocks just doesn't cut it (unquantified). http://www.efficientfrontier.com/ef/900/15st.htm

It all comes down to stock pickers figuring out the optimum portfolio size and a lot of assumptions.  Managing a 50 stock portfolio is tough. The whole thing is mute now with ETFs giving you the whole world for the price of a few basis points. 

But even if its just 30 stocks, modern stock pickers would try to cover key sectors. 

Managing a 50 stock portfolio is tough, but probably less tough than managing a 200 stock portfolio if you know your holdings well. Most successful active managers run fairly concentrated portfolios, have low turnover and relatively long holding periods, and accept that there will be times when their performance is very different from the market. If you want passive, I agree that you can get that very cheaply now even on a global basis. I think it's moot not mute you mean though.....:) 
Not all stock pickers will attempt to cover 'key' sectors. If they fundamentally don't like them they won't hold them is my experience of several successful managers. 

Diplodicus

I ve held Apple and Glaxo since they had the same market cap. 
In my very limited sample I found rebalancing did not work except in specific circumstances where two assets would see-saw repeatedly. Which is the model chosen in the paper funnily enough.

BritishInvestor

MarkCarnage said:

Deleted_User said:

JohnWinder said:

There has been various work showing that in practice owning a relatively small number of stocks (up to 30 or at most 50) will provide c90% of diversification benefit....however that is only against that particular universe benchmark within equities.

I'd be interested to see that research, firstly to learn how one quantifies the benefit of diversification but also to see how it stacks up against Bernstein's assertion that 50 stocks just doesn't cut it (unquantified). http://www.efficientfrontier.com/ef/900/15st.htm

It all comes down to stock pickers figuring out the optimum portfolio size and a lot of assumptions.  Managing a 50 stock portfolio is tough. The whole thing is mute now with ETFs giving you the whole world for the price of a few basis points. 

But even if its just 30 stocks, modern stock pickers would try to cover key sectors. 

Managing a 50 stock portfolio is tough, but probably less tough than managing a 200 stock portfolio if you know your holdings well. Most successful active managers run fairly concentrated portfolios, have low turnover and relatively long holding periods, and accept that there will be times when their performance is very different from the market. If you want passive, I agree that you can get that very cheaply now even on a global basis. I think it's moot not mute you mean though.....:) 
Not all stock pickers will attempt to cover 'key' sectors. If they fundamentally don't like them they won't hold them is my experience of several successful managers. 

"Most successful active managers"

I wasn't aware that there were many - Peter Lynch was definitely one. Have there been any since?

Prism

BritishInvestor said:

MarkCarnage said:

Deleted_User said:

JohnWinder said:

There has been various work showing that in practice owning a relatively small number of stocks (up to 30 or at most 50) will provide c90% of diversification benefit....however that is only against that particular universe benchmark within equities.

I'd be interested to see that research, firstly to learn how one quantifies the benefit of diversification but also to see how it stacks up against Bernstein's assertion that 50 stocks just doesn't cut it (unquantified). http://www.efficientfrontier.com/ef/900/15st.htm

It all comes down to stock pickers figuring out the optimum portfolio size and a lot of assumptions.  Managing a 50 stock portfolio is tough. The whole thing is mute now with ETFs giving you the whole world for the price of a few basis points. 

But even if its just 30 stocks, modern stock pickers would try to cover key sectors. 

Managing a 50 stock portfolio is tough, but probably less tough than managing a 200 stock portfolio if you know your holdings well. Most successful active managers run fairly concentrated portfolios, have low turnover and relatively long holding periods, and accept that there will be times when their performance is very different from the market. If you want passive, I agree that you can get that very cheaply now even on a global basis. I think it's moot not mute you mean though.....:) 
Not all stock pickers will attempt to cover 'key' sectors. If they fundamentally don't like them they won't hold them is my experience of several successful managers. 

"Most successful active managers"

I wasn't aware that there were many - Peter Lynch was definitely one. Have there been any since?

I suppose that depends on how you measure success and over what time period. e.g overall return over 20 years or number of good years vs bad years. Maybe its just based on public opinion. 

Was Woodford a successful manager? Peter Spiller? Mark Mobius?

BritishInvestor

Prism said:

BritishInvestor said:

MarkCarnage said:

Deleted_User said:

JohnWinder said:

There has been various work showing that in practice owning a relatively small number of stocks (up to 30 or at most 50) will provide c90% of diversification benefit....however that is only against that particular universe benchmark within equities.

I'd be interested to see that research, firstly to learn how one quantifies the benefit of diversification but also to see how it stacks up against Bernstein's assertion that 50 stocks just doesn't cut it (unquantified). http://www.efficientfrontier.com/ef/900/15st.htm

It all comes down to stock pickers figuring out the optimum portfolio size and a lot of assumptions.  Managing a 50 stock portfolio is tough. The whole thing is mute now with ETFs giving you the whole world for the price of a few basis points. 

But even if its just 30 stocks, modern stock pickers would try to cover key sectors. 

Managing a 50 stock portfolio is tough, but probably less tough than managing a 200 stock portfolio if you know your holdings well. Most successful active managers run fairly concentrated portfolios, have low turnover and relatively long holding periods, and accept that there will be times when their performance is very different from the market. If you want passive, I agree that you can get that very cheaply now even on a global basis. I think it's moot not mute you mean though.....:) 
Not all stock pickers will attempt to cover 'key' sectors. If they fundamentally don't like them they won't hold them is my experience of several successful managers. 

"Most successful active managers"

I wasn't aware that there were many - Peter Lynch was definitely one. Have there been any since?

I suppose that depends on how you measure success and over what time period. e.g overall return over 20 years or number of good years vs bad years. Maybe its just based on public opinion. 

Was Woodford a successful manager? Peter Spiller? Mark Mobius?

Succesful to me is genuine alpha that can't be explained by readily available factors that can be purchased for buttons. (Obviously, success at marketing is a different discussion ).

MarkCarnage

BritishInvestor said:

MarkCarnage said:

Deleted_User said:

JohnWinder said:

There has been various work showing that in practice owning a relatively small number of stocks (up to 30 or at most 50) will provide c90% of diversification benefit....however that is only against that particular universe benchmark within equities.

I'd be interested to see that research, firstly to learn how one quantifies the benefit of diversification but also to see how it stacks up against Bernstein's assertion that 50 stocks just doesn't cut it (unquantified). http://www.efficientfrontier.com/ef/900/15st.htm

It all comes down to stock pickers figuring out the optimum portfolio size and a lot of assumptions.  Managing a 50 stock portfolio is tough. The whole thing is mute now with ETFs giving you the whole world for the price of a few basis points. 

But even if its just 30 stocks, modern stock pickers would try to cover key sectors. 

Managing a 50 stock portfolio is tough, but probably less tough than managing a 200 stock portfolio if you know your holdings well. Most successful active managers run fairly concentrated portfolios, have low turnover and relatively long holding periods, and accept that there will be times when their performance is very different from the market. If you want passive, I agree that you can get that very cheaply now even on a global basis. I think it's moot not mute you mean though.....:) 
Not all stock pickers will attempt to cover 'key' sectors. If they fundamentally don't like them they won't hold them is my experience of several successful managers. 

"Most successful active managers"

I wasn't aware that there were many - Peter Lynch was definitely one. Have there been any since?

Yes I would say so. Not all operate in high profile retail space. I would also widen it to risk adjusted return. In a previous life I constructed an institutional equity portfolio of several billion which achieved long term returns (> 10 years) of 2% above market index on an annualised basis. Not all of them performed well every year, but in most cases underperformance was in strong bull market phases. 
No doubt you will contend that 12 years isn't long enough, but what is long enough? Buffet managed it for a very long time, until he got too big, and tech stocks began to dominate. His long term performance remains impressive. 
If you are suggesting that success is defined by beating the market every year, I agree there is no one, but if your time horizon is only a year you shouldn't be in equities. 
I also have a philosophical question....if everyone 'owns the market'  i.e. 100% passive, how is price discovery arrived at, how is capital efficiently allocated? The market return itself is likely to decline as a result. 

MarkCarnage

I would add to the above that I fully accept that active management is not for everyone, however it has worked for some who have the knowledge and time to do it well. 
I would contend that for many retail investors a bigger problem is - back to the title of this thread - market timing....which sadly is buy high and sell low for far too many still. 

BritishInvestor

MarkCarnage said:

BritishInvestor said:

MarkCarnage said:

Deleted_User said:

JohnWinder said:

There has been various work showing that in practice owning a relatively small number of stocks (up to 30 or at most 50) will provide c90% of diversification benefit....however that is only against that particular universe benchmark within equities.

I'd be interested to see that research, firstly to learn how one quantifies the benefit of diversification but also to see how it stacks up against Bernstein's assertion that 50 stocks just doesn't cut it (unquantified). http://www.efficientfrontier.com/ef/900/15st.htm

It all comes down to stock pickers figuring out the optimum portfolio size and a lot of assumptions.  Managing a 50 stock portfolio is tough. The whole thing is mute now with ETFs giving you the whole world for the price of a few basis points. 

But even if its just 30 stocks, modern stock pickers would try to cover key sectors. 

Managing a 50 stock portfolio is tough, but probably less tough than managing a 200 stock portfolio if you know your holdings well. Most successful active managers run fairly concentrated portfolios, have low turnover and relatively long holding periods, and accept that there will be times when their performance is very different from the market. If you want passive, I agree that you can get that very cheaply now even on a global basis. I think it's moot not mute you mean though.....:) 
Not all stock pickers will attempt to cover 'key' sectors. If they fundamentally don't like them they won't hold them is my experience of several successful managers. 

"Most successful active managers"

I wasn't aware that there were many - Peter Lynch was definitely one. Have there been any since?

Yes I would say so. Not all operate in high profile retail space. I would also widen it to risk adjusted return. In a previous life I constructed an institutional equity portfolio of several billion which achieved long term returns (> 10 years) of 2% above market index on an annualised basis. Not all of them performed well every year, but in most cases underperformance was in strong bull market phases. 
No doubt you will contend that 12 years isn't long enough, but what is long enough? Buffet managed it for a very long time, until he got too big, and tech stocks began to dominate. His long term performance remains impressive. 
If you are suggesting that success is defined by beating the market every year, I agree there is no one, but if your time horizon is only a year you shouldn't be in equities. 
I also have a philosophical question....if everyone 'owns the market'  i.e. 100% passive, how is price discovery arrived at, how is capital efficiently allocated? The market return itself is likely to decline as a result. 

Buffett's alpha was factor and leverage based according to AQR (although to be fair, the factors weren't known about at the time).

https://www.aqr.com/Insights/Research/Alternative-Thinking/Superstar-Investors

I think there were definitely inefficiencies a few decades ago that enabled humans to generate alpha, but once computers started running the markets, less so.


"if everyone 'owns the market'  i.e. 100% passive, how is price discovery arrived at, how is capital efficiently allocated? The market return itself is likely to decline as a result. "

There will always be those exploiting short term inefficiencies (holding periods of a few days), but these tend to be computer-based quant outfits.

Diplodicus

Deleted_User said:

Prism said:

Diplodicus said:

MK62 said:

.....but then, collectively, they haven't diversified anything.....collectively they still hold the same investments, so how could they get a better collective return?

They cannot, by any sample. Even if every investment were diversified through every investor, it would not improve the collective return. No free lunch.

You seem focused on return. Overall return is not the most important factor for many people. Diversification reduces the risk by bringing the return closer to the average.

Its more than that.  Diversification reduces risk AND improves compounded returns. Smoothing returns makes you wealthier.  Here is an example. 

https://www.cfasociety.org/calgary/Documents/Professionals_3.%20The%20Benefits%20of%20Diversification.pdf

Having had a look at the paper (and struggling with the equations), two requests: 

"Where the magic happens" is already behind the link. It says at  p5. In section 2b, we explained that volatility reduces an asset’s compounded return. Tried google but it did not take me there. The link starts at 3a. Could you provide a link to 2b, please? It may be a failure of my imagination but I don't yet understand in logic why it should be so. 

Nonetheless, I do know of certain patterns where diversification and rebalancing works, and the paper has found one such example in the performance of Russell1000 and 10yr US Treasury Bonds 1990/2014. But does anyone have the periodic and compounded return of each from 2014 to now? Because I'm pretty sure if the example was continued, the results and the conclusions would be turned on their heads. 

BritishInvestor

Diplodicus said:

Deleted_User said:

Prism said:

Diplodicus said:

MK62 said:

.....but then, collectively, they haven't diversified anything.....collectively they still hold the same investments, so how could they get a better collective return?

They cannot, by any sample. Even if every investment were diversified through every investor, it would not improve the collective return. No free lunch.

You seem focused on return. Overall return is not the most important factor for many people. Diversification reduces the risk by bringing the return closer to the average.

Its more than that.  Diversification reduces risk AND improves compounded returns. Smoothing returns makes you wealthier.  Here is an example. 

https://www.cfasociety.org/calgary/Documents/Professionals_3.%20The%20Benefits%20of%20Diversification.pdf

Having had a look at the paper (and struggling with the equations), two requests: 

"Where the magic happens" is already behind the link. It says at  p5. In section 2b, we explained that volatility reduces an asset’s compounded return. Tried google but it did not take me there. The link starts at 3a. Could you provide a link to 2b, please? It may be a failure of my imagination but I don't yet understand in logic why it should be so. 

Nonetheless, I do know of certain patterns where diversification and rebalancing works, and the paper has found one such example in the performance of Russell1000 and 10yr US Treasury Bonds 1990/2014. But does anyone have the periodic and compounded return of each from 2014 to now? Because I'm pretty sure if the example was continued, the results and the conclusions would be turned on their heads. 

"In section 2b, we explained that volatility reduces an asset’s compounded return. "

Volatility drag?

http://www.annuitydigest.com/volatility-drag/definition