Market Philosophy and Mutual Funds

[theBruiser500]

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I do not believe the market is particularly efficient. In college, I held pretty firmly to the Random Walk Down Wall Street mentality (suprise, suprise) of market efficiency, however, I no longer believe in such efficiency. I believe there are people capable of beating the markets. Most importantly, however, I believe these people are few, and I certainly am not one of them.

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I'm reading a Random Walk Down Wall Street right now, very interesting book. What led you to change your mind?

[theBruiser500]

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I remember reading that most of the top managers felt hampered by the regulations of mutual funds. It seems to me that if I were gonna go with the highest reward/risk ratio, you'd have to look at hedge funds, not mutual funds, that is, if you believe managers can outperform the market.

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What are hedge funds compared to mutual funds?

[adios]

You didn't ask me but I'll barge in nonetheless. The book is a good book IMO. The markets are effecient but IMO not instantaneously effecient if that makes any sense.

[adios]

Hedge Fund Definition

hedge fund
A fund, usually used by wealthy individuals and institutions, which is allowed to use aggressive strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives. Hedge funds are exempt from many of the rules and regulations governing other mutual funds, which allows them to accomplish aggressive investing goals. They are restricted by law to no more than 100 investors per fund, and as a result most hedge funds set extremely high minimum investment amounts, ranging anywhere from $250,000 to over $1 million. As with traditional mutual funds, investors in hedge funds pay a management fee; however, hedge funds also collect a percentage of the profits (usually 20%).


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Mutual Fund Definition

mutual fund
An open-ended fund operated by an investment company which raises money from shareholders and invests in a group of assets, in accordance with a stated set of objectives. mutual funds raise money by selling shares of the fund to the public, much like any other type of company can sell stock in itself to the public. Mutual funds then take the money they receive from the sale of their shares (along with any money made from previous investments) and use it to purchase various investment vehicles, such as stocks, bonds and money market instruments. In return for the money they give to the fund when purchasing shares, shareholders receive an equity position in the fund and, in effect, in each of its underlying securities. For most mutual funds, shareholders are free to sell their shares at any time, although the price of a share in a mutual fund will fluctuate daily, depending upon the performance of the securities held by the fund. Benefits of mutual funds include diversification and professional money management. Mutual funds offer choice, liquidity, and convenience, but charge fees and often require a minimum investment. A closed-end fund is often incorrectly referred to as a mutual fund, but is actually an investment trust. There are many types of mutual funds, including aggressive growth fund, asset allocation fund, balanced fund, blend fund, bond fund, capital appreciation fund, clone fund, closed fund, crossover fund, equity fund, fund of funds, global fund, growth fund, growth and income fund, hedge fund, income fund, index fund, international fund, money market fund, municipal bond fund, prime rate fund, regional fund, sector fund, specialty fund, stock fund, and tax-free bond fund.

[Senor Choppy]

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Research the fund managers. They are the key.

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The problem is that the sample size for the performance of funds and fund managers is so small it isn't necessarily relevant.

It's true that the managers are the key, but it's impossible, except in extreme situations, to determine who has been smart and who has been lucky.

[zerosum]

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The markets are effecient but IMO not instantaneously effecient if that makes any sense.

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Your opinion makes perfect sense to me. It's reasonable to believe that the markets are efficient in the long run but that they can be inefficient over short to intermediate time horizons. Hence the old saying that the market is a voting machine in the short run and a weighing machine in the long run. Translation: the emotion of market participant tends to trump their reason in the short term, but not long term.

[theBruiser500]

adios, thanks. also regarding the efficient markets i found the castle in the air stuff interestging, like the tulip craze etc.

[J_V]

From what I have gathered, there are enough people who can beat the market consistently to suggest some degree of inefficiency. You could argue that with millions of investors, some are bound to get very lucky over and over again, but from what I have heard, the academics are no longer pushing efficient market theory in practice anymore.

[DesertCat]

Warren Buffett wrote that efficient market proponents "observing correctly that the market was frequently efficient, went on to conclude incorrectly that it was always efficient. The difference between these propositions is night and day." He also wrote an essay debunking the efficient theory called "The SuperInvestors of Graham and Doddsville".

The old joke is that an economist won't stoop to pick up a ten dollar bill because if it really existed someone would have picked it up already. John Kay probably described it best when he wrote "Kay concludes, "The efficient market hypothesis is 90% true, and and you will lose money by ignoring it. The search for the elusive 10%, like the search for discarded $10 bills, attracts effort greater than rewards. But for the very few skilled searchers, the rewards can be large indeed."

The performance of actively managed mutual funds has been used to support EM theory (95%+ trail the market), but it's typically their high costs vs. index funds that hurt them, i.e. many mutual funds do beat the market, but not after deducting fees.

[OrangeCat]

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For non IRA money I suggest www.freetrade.com + ETFs and closed ends.


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Just curious, why do you say non-IRA money?