Timing the market

Thrugelmir

sevenhills said:

Except that the FTSE all share is slightly lower now than it was over a year ago.

8 billion has been withdrawn from UK equity funds in the past year. Momentum is with global. As that's where investors perceive future returns to lie. 

BritishInvestor

I thought this was a well-written article

https://bankeronfire.com/beat-the-stock-market

MK62

As is common with such articles, it's US based, where it's widely accepted that outperforming is more difficult. It also leaves out as much information as it gives.......for instance the graph showing the % of large cap funds which underperformed the S&P 500........how many funds are we talking about, and by how much did they underperform?......this just might be relevant, as all the passive index funds tracking the S&P 500 will also underperform that index (unless they don't track it very well and accidentally beat it).....are they also included in that data or not?
Being as it's practically impossible to invest for free, a more reasonable scenario would be to compare US equity funds to a fund which tracks the S&P 500, rather than the index itself, but which one?.....even trackers which track that index don't have the same returns over time.......and then how do you decide which funds to include in the data?.....just because a fund says "US Equity" doesn't necessarily mean it only invests in a subset of the S&P 500, or even only in the US.

BritishInvestor

MK62 said:

As is common with such articles, it's US based, where it's widely accepted that outperforming is more difficult. It also leaves out as much information as it gives.......for instance the graph showing the % of large cap funds which underperformed the S&P 500........how many funds are we talking about, and by how much did they underperform?......this just might be relevant, as all the passive index funds tracking the S&P 500 will also underperform that index (unless they don't track it very well and accidentally beat it).....are they also included in that data or not?
Being as it's practically impossible to invest for free, a more reasonable scenario would be to compare US equity funds to a fund which tracks the S&P 500, rather than the index itself, but which one?.....even trackers which track that index don't have the same returns over time.......and then how do you decide which funds to include in the data?.....just because a fund says "US Equity" doesn't necessarily mean it only invests in a subset of the S&P 500, or even only in the US.

"As is common with such articles, it's US based, where it's widely accepted that outperforming is more difficult."

I'm not sure where this "wide acceptance" came from - quant firms will be in most markets removing inefficiencies.

But that's not really the point of the article. He is proposing there are 4 ways to beat the market:

1. Insider trading

2. HFT - trying to build a rudimentary understanding of order book logic (on more "modern" exchanges) is tough, let alone building the systems and infrastructure to compete in a brutal environment. 

3. Fundamental investors (Lynch is mentioned, but as I've pointed out, the market was very different back then).
"The only challenge is figuring out who they might be – ahead of time." - definitely tricky


4. Quant firms
It's definitely worth a read of this if you've not spent time working in the markets

https://www.amazon.co.uk/Man-Who-Solved-Market-Revolution-ebook/dp/B07NLFC63Y/

Application forms here

https://www.rentec.com/Careers.action


And the most important point

"As their trading profits piled up, the quant shops realized they are much better off keeping the spoils to themselves."

"And yes, this applies to anyone else who figured out a way to make a superior risk-adjusted return."

Prism

Since options 1,2 and unfortunately 4 are unavailable to us mere mortals I guess that leaves us with either selecting a fund manager for option 3 or doing our own research. I don't believe selecting a fund manager ahead of time is as difficult as you seem to think it is and there are likely some decent individual retail investors around who do their own fundamental analysis - very few stats around to prove or disprove those last two points - plenty of anecdotes though.

BritishInvestor

Prism said:

Since options 1,2 and unfortunately 4 are unavailable to us mere mortals I guess that leaves us with either selecting a fund manager for option 3 or doing our own research. I don't believe selecting a fund manager ahead of time is as difficult as you seem to think it is and there are likely some decent individual retail investors around who do their own fundamental analysis - very few stats around to prove or disprove those last two points - plenty of anecdotes though.

"!guess that leaves us with either selecting a fund manager for option 3 or doing our own research"

Or just buying the total market for low cost?

"I don't believe selecting a fund manager ahead of time is as difficult as you seem to think "

Even when you've seen what you and the active fund manager world is up against! Have you read the Jim Simons book? 'The Incredible Shrinking Alpha' is another good read.

"and there are likely some decent individual retail investors around who do their own fundamental analysis"

See my DFM point, and their lack of success

"very few stats around to prove or disprove those last two points"

There's lots of evidence on the lack of persistent outperformance with active funds, and also investor vs investment returns

Prism

"I don't believe selecting a fund manager ahead of time is as difficult as you seem to think "

Even when you've seen what you and the active fund manager world is up against! Have you read the Jim Simons book? 'The Incredible Shrinking Alpha' is another good read.

"and there are likely some decent individual retail investors around who do their own fundamental analysis"

See my DFM point, and their lack of success

"very few stats around to prove or disprove those last two points"

There's lots of evidence on the lack of persistent outperformance with active funds, and also investor vs investment returns

There is lots of evidence that in general active funds do not outperform their benchmark. There is little evidence of how many investors manage to avoid those funds in favour of better performing funds ahead of time. To do that you would need to track individual investor data which is private - or ask them which would also be difficult as most don't keep track. For example my own platform doesn't even keep track of my historical returns so how could any research do so?

Some platforms attempt to estimate the average returns by investors by year, age group etc but these cannot take into account overall investor performance across multiple platforms.

Going on your point 3 only, fundamental based managers are not really up against the others. They don't really care what the traders and quants are up to. The current price of a share is much less important than the fundamentals of the company. Some are better than others at analysing those fundamentals. So yes, I still fancy my chances in the less researched parts of the world market.

BritishInvestor

Prism said:

"I don't believe selecting a fund manager ahead of time is as difficult as you seem to think "

Even when you've seen what you and the active fund manager world is up against! Have you read the Jim Simons book? 'The Incredible Shrinking Alpha' is another good read.

"and there are likely some decent individual retail investors around who do their own fundamental analysis"

See my DFM point, and their lack of success

"very few stats around to prove or disprove those last two points"

There's lots of evidence on the lack of persistent outperformance with active funds, and also investor vs investment returns

There is lots of evidence that in general active funds do not outperform their benchmark. There is little evidence of how many investors manage to avoid those funds in favour of better performing funds ahead of time. To do that you would need to track individual investor data which is private - or ask them which would also be difficult as most don't keep track. For example my own platform doesn't even keep track of my historical returns so how could any research do so?

Some platforms attempt to estimate the average returns by investors by year, age group etc but these cannot take into account overall investor performance across multiple platforms.

Going on your point 3 only, fundamental based managers are not really up against the others. They don't really care what the traders and quants are up to. The current price of a share is much less important than the fundamentals of the company. Some are better than others at analysing those fundamentals. So yes, I still fancy my chances in the less researched parts of the world market.

"fundamental based managers are not really up against the others."

I'm not really sure what you are paying them for in that case?

"They don't really care what the traders and quants are up to"

I can assure you it was a lot easier when they weren't around. 

"Some are better than others at analysing those fundamentals"

But this is low hanging fruit. In fact, it's probably rotten fruit that fell from the tree many years ago and has been sitting on the ground for a long time! The chance of you finding something that thousands of others have missed is remote. The market tends to be pretty tough in that respect. 

Prism

BritishInvestor said:

Prism said:

"I don't believe selecting a fund manager ahead of time is as difficult as you seem to think "

Even when you've seen what you and the active fund manager world is up against! Have you read the Jim Simons book? 'The Incredible Shrinking Alpha' is another good read.

"and there are likely some decent individual retail investors around who do their own fundamental analysis"

See my DFM point, and their lack of success

"very few stats around to prove or disprove those last two points"

There's lots of evidence on the lack of persistent outperformance with active funds, and also investor vs investment returns

There is lots of evidence that in general active funds do not outperform their benchmark. There is little evidence of how many investors manage to avoid those funds in favour of better performing funds ahead of time. To do that you would need to track individual investor data which is private - or ask them which would also be difficult as most don't keep track. For example my own platform doesn't even keep track of my historical returns so how could any research do so?

Some platforms attempt to estimate the average returns by investors by year, age group etc but these cannot take into account overall investor performance across multiple platforms.

Going on your point 3 only, fundamental based managers are not really up against the others. They don't really care what the traders and quants are up to. The current price of a share is much less important than the fundamentals of the company. Some are better than others at analysing those fundamentals. So yes, I still fancy my chances in the less researched parts of the world market.

"fundamental based managers are not really up against the others."

I'm not really sure what you are paying them for in that case?

"They don't really care what the traders and quants are up to"

I can assure you it was a lot easier when they weren't around. 

"Some are better than others at analysing those fundamentals"

But this is low hanging fruit. In fact, it's probably rotten fruit that fell from the tree many years ago and has been sitting on the ground for a long time! The chance of you finding something that thousands of others have missed is remote. The market tends to be pretty tough in that respect. 

I meant that they seem to be working on different measures and over different timescales. Quants and traders are all about the price and the here and now. They of course hope that they can repeatedly do that over many years. The fundamentals based fund managers don't pay all that much attention to price - at least todays price. They are trying to come up with scenarios that envision where a company might be in 10 years time financially, not what the share price of that company might do. Some try to base their decision around macro, politics and economic cycles - that seems more difficult and I see few managing to do that with regular success. 

Anyway, the only thing that really matters is are we any good at finding these fund managers ahead of time. Hard to know. The SPIVA reports suggest that it does happen in some areas as the total return figures are much better than the % underperforming funds suggest. The exception is the US stock market and by extension the global market. There is no requirement to invest completely or in fact at all in those markets though.

fancible

OP here. Looks like my hunch re a market correction was correct and in this case sitting on the sidelines waiting for it to has probably payed off for me. I could equally of course have missed the boat, but those are the choices every individual needs to take. Now to time the bottom! I still think there are further falls ahead, but who knows 🤷