Is the stock market +EV?

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Adios,

I will direct you to Hirsh's Stock Traders Almanac, for simple strategies that beat long term buy and holding the SP500, at reduced risk.

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If there are so many "simple strategies" for beating the market, Why do the MAJORITY of mutual funds find it so hard to beat the s & p 500 consistently? Why do they suck so bad when they spend hundreds of man hours studying stocks, while a person sitting with an s & p 500 fund spends a total of 5 minutes buying their fund and beats them?

As Benjamin Graham said (summarized), beating the market on a continual basis is a task that is not as easy as it sounds. It requires a fundamental understanding of historically proper investment strategy (i.e. value investing). I take what I like to call a modern approach to value investing, mixing in some growth characteristics and discounting the importance of book value in the modern market. My performance over a 10 year period has averaged 5% more growth per year than the s & p 500. Statistical anomaly? Maybe, but if you can't be good, then get lucky!

Whatever the case, EV+ is much larger in the stock market than in nearly all investment vehicles. Low risk over the long run (short run fluctuations can definately occur) and high return, what more could you ask for.

[Sniper]

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If there are so many "simple strategies" for beating the market, Why do the MAJORITY of mutual funds find it so hard to beat the s & p 500 consistently?

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Repeat after me... Mutual Funds play a different game than individual investors!

You presume that the goal of most mutual funds is to beat the market.. it is not!

You presume that it is just as easy to achieve a high rate of return on $1 Billion, as it is on 100 Thousand... it is not!

You presume that a mutual fund manager can do everything in the market that an individual investor can do... he can not!

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You presume that the goal of most mutual funds is to beat the market.. it is not!




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Alright, I'll buy most of your post, as the argument is very strong for large funds (however, there are still hundreds of small funds that can invest in the same way that I can). However, why is the goal of an equity fund not to beat a stationary index (s and p 500) each year? Why would ANYONE invest in a fund that they know has a goal to lag behind a fund that is not managed? Are there that many people out there that are paranoid that the s and p 500 will not achieve up to historical standards (which it probably won't with as many people that are investing in these funds now, however, the rates will still be very good).

[Sniper]

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Alright, I'll buy most of your post, as the argument is very strong for large funds

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Thanks [img]/images/graemlins/smile.gif[/img]

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however, there are still hundreds of small funds that can invest in the same way that I can

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No they can't... not unless you have 50 million to invest and your actions are regulated by the gov't for some strange reason [img]/images/graemlins/wink.gif[/img]

There are rules that mutual funds must comply with, that severely restrict their actions, compared to an individual investor.

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However, why is the goal of an equity fund not to beat a stationary index (s and p 500) each year?

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The goal of SP500 funds (some of the largest) is simply to match the returns of the SP500 index. Then there are sector funds, their goal is to match returns of specific sectors of the market. Then there are international funds, their goal is to provide returns matching international indexes. Then their are income funds, who's goal is to throw off dividends to people. There are Bond funds who's goal is to return some amount of interest ever year... etc etc etc.

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Why would ANYONE invest in a fund that they know has a goal to lag behind a fund that is not managed?

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People invest for lots of reasons. For the vast majority of people, they truly have no idea why, except that they were told it was a good idea [img]/images/graemlins/wink.gif[/img]

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Are there that many people out there that are paranoid that the s and p 500 will not achieve up to historical standards

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Its probably worth noting that the SP500 is not the best place to invest, its simply the easiest for someone who hasn't taken the time to educate themselves.

Take a look at my 3rd quarter comparison post at the end of the 2+2 competition thread....
http://forumserver.twoplustwo.com/sh...14&fpart=1

Hi Squiffy, in a closed environment, can you ever have a non-zero sum game over the long term? To take your coconuts analogy, it seems that first you are correcting inefficiecies (amount of labor,technology) in the market for coconuts, and then you're expanding out of the original village (attacking other villagers). Eventually however you hit a limit, where it becomes a zero sum game because each additional increase in production is associated with a decrease in some other resource.

It seems like the real increase in wealth comes from expansion, otherwise the market would devolve into a zero sum poker game, with technology only increasing the magnitude of the swings (think multitabling)

[DesertCat]

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Repeat after me... Mutual Funds play a different game than individual investors!

You presume that the goal of most mutual funds is to beat the market.. it is not!

You presume that it is just as easy to achieve a high rate of return on $1 Billion, as it is on 100 Thousand... it is not!

You presume that a mutual fund manager can do everything in the market that an individual investor can do... he can not!

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While I agree with everything else Sniper has written here, he's guilty of a little hyperbole in saying that beating the S&P 500 isn't a goal of actively managed mutual funds. That's the route to riches, see Bill Miller for a great example. But Sniper is right in that the primary goal of mutual funds is to get clients to invest more so the fund can make more money.

And whether it's their goal or not, most of them can't beat the S&P500 (after fees). As Sniper has pointed out, the structure of mutual funds are horribly restricting. Many good money managers go the private investment fund route (hedge funds) because it allows them to take off some off the shackles of mutual funds.

Private funds typically have performance fees so that good managers are rewarded, while mutual funds typically get the same percentage whether the fund is up or down.
That means while beating the SEP 500 is A goal of mutual funds, their highest priority is to add clients money. They'd much prefer to trail indexes while getting more clients to invest more money, then to beat the index as a closed fund.

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Are there that many people out there that are paranoid that the s and p 500 will not achieve up to historical standards

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Its probably worth noting that the SP500 is not the best place to invest, its simply the easiest for someone who hasn't taken the time to educate themselves.

Take a look at my 3rd quarter comparison post at the end of the 2+2 competition thread....
http://forumserver.twoplustwo.com/sh...14&fpart=1

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Obviously I was referring to someone looking for a quick way to get involved in the stock market. I am very comfortable with my knowledge and investment style at the present time, and I feel that i have a long enough track record to justify my passive style for the rest of my life. I have read hundreds of books, articles, etc. on investing and have come to conclusions about the lowest risk-highest return methods of investing, so I do not own any index funds.

Getting back on subject, the thing that is troubling thoughi s that people WILL buy a hot fund over the s and p 500, even though very few mutual funds can beat this index continually. Just doesn't make a whole lot of sense when the track record is there.

And finally, one quarter of performance is not an indicator of any sort of success. I believe that I could be a statistical anomaly and I have had 10 significant years in the investing world.

In short, though, to answer the original posters question, as you can see from this discussion, its not a matter of is the stock market +ev (which it is unless you try some really goofy strategies, day trading, technical analysis etc.), but how much +ev it is. Its as close to a sure bet as can be achieved for the potential reward and risk.

[squiffy]

Well at some point, it becomes a question of philosophy. And the answer depends on your frame of reference.

From the standpoint of energy in the universe, energy is supposedly neither created nor destroyed, but merely transformed from one state to another.

If your frame of reference is at the level of humans only on planet earth, which seems more relevant, then eventually, human population may become so concentrated, say in China or India, that greater wealth in China, can only come at the expense of American, Russia, Japan, Mongolia (assuming limited land and natural resources.)

But if you focus only on one country USA, and the USA has plenty of resources (USA in 1600, 1700, 1800, 1900) which it can take from the Indians, the Mexicans, the Spanish, the British, the French, etc., or land unclaimed by anyone which it can settle, then America can clearly expand its wealth continually.

In theory though, scarce resources are limited, and humans could be in an environment where you have to take someone else's wealth to have any wealth of your own.

For the time being though, it seems as though the human population to natural wealth ratio still allows non zero-sum growth for multiple societies, simultaneously.

[DesertCat]

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In theory though, scarce resources are limited, and humans could be in an environment where you have to take someone else's wealth to have any wealth of your own.

For the time being though, it seems as though the human population to natural wealth ratio still allows non zero-sum growth for multiple societies, simultaneously.

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There is no "natural wealth". All wealth is created through the "sweat of your brow". Natural resources are a nice plus, but it's work that translates any resource into wealth. The U.S. has more wealth primarily because of an economic system that rewards work, and a political system that allows you to keep (most) of the results of your work. It's not a zero sum game, work creates new value.

Fifty years ago African nations were wealthier than Asian nations. It makes sense, Africa has tremendous natural resources, Asian nations are burdened by too many citizens, and not enough resources. The last fifty years African nations have typically been run by numerous kleptocrats, mass murderers, white racists, and incompetent socialists. Asian nations embraced capitalism and (mostly) democratic freedoms.

Fifty years later, the average asian is many times wealthier than the average african.

[squiffy]

Just semantics. If I inherited 10 million acres of undeveloped American land, rich in natural resources, animals, water, oil, etc., and in a desirable location for urban development, I would have lots of natural wealth. Yes, work must be done to develop it, but it's wealth.

You can define wealth in slightly different ways, but it would not be that useful to pretend the land itself has no wealth or is not a form of wealth. It's natural because I did not create the land. I create a bicycle through my work.

The land was there before man was around, hence my definition as natural.

Just semantics.