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  #11  
Old 07-08-2005, 12:17 AM
Peter666 Peter666 is offline
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Default Re: Why Mutual Funds are better than Index Funds

As I live in Canada, I will give a Canadian example. Our equivalent of the S&P 500 is the Toronto Stock Exchange and S&P composite. Over the last ten years, this composite index has made roughly 9% interest with the worst single calendar year (2002) being at about -14%. A great mutual fund run by Kim Shannon over 10 years has produced roughly 14% interest on average after expenses, with the worst single calendar year (2002) being at 0%.

You can take any type of index fund for any investment style and find at least a couple of superior mutual funds.

For American investing, I like to compare the 40 plus years performance of Berkshire Hathaway to the S&P 500.

An index is simply just that: an index of the average performance of stocks on an exchange for a given period of time. It is a valuable tool in judging the performance of mutual funds and stocks, but I do not know why anybody would invest in an index when there are talented managers providing both less fluctuation and superior return in their mutual funds.
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  #12  
Old 07-08-2005, 01:04 AM
parttimepro parttimepro is offline
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Default Re: Why Mutual Funds are better than Index Funds

[ QUOTE ]
You can take any type of index fund for any investment style and find at least a couple of superior mutual funds.

[/ QUOTE ]
Sure, and if you have a thousand people flip a coin 8 times, one is likely to get all heads. There are enough funds out there that it would be quite surprising if some didn't seem to consistently beat the market.

The real test is whether those funds are more likely than other funds to continue to beat the market. They don't. If you take funds which outperformed from 1993-2003 and compare them to underperforming funds from that period, which would you predict would do better in 2004? Turns out they're about the same.

Luck plays a far larger role in stock picking success than most would like to admit.
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  #13  
Old 07-08-2005, 08:43 AM
midas midas is offline
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Default Re: Why Mutual Funds are better than Index Funds

1. Which fund that Kim manages are you referencing?

2. How do you think a TSE index compares to the S&P 500 index in terms of diversity and market cap of company? You need to make sure you are comparing apples to apples - if you took the top 500 companies by market cap in Canada some would be S&P 500 worthy and others on the lower end would get put in the mid-cap category. If you are looking at mid cap comps you need to compare against MDY in the U.S.
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  #14  
Old 07-08-2005, 08:44 AM
player24 player24 is offline
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Default Re: Why Mutual Funds are better than Index Funds

[ QUOTE ]
if you have a thousand people flip a coin 8 times, one is likely to get all heads

[/ QUOTE ]

yes, and we will put that person's picture on the cover of Barron's and we will write a feature story about his coin flipping technique...and he will explain to us that most coin flippers put too much wrist action into their flips, whereas he ascribes to the view that elbow action is key to coin flipping success...and the public will idolize him for his insight and ability...and he will buy a house in the Hamptons, drive a ferrari and retire at age 40. [img]/images/graemlins/cool.gif[/img]
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  #15  
Old 07-08-2005, 09:15 AM
wildwood wildwood is offline
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Default Re: Why Mutual Funds are better than Index Funds

Hi Peter,
You seem to be saying that a few non-index mutual funds have better performance overall than all index mutual funds based on the premise that Warren Buffett, Bill Miller etc. are some of the top money managers on the planet. But I think you would agree that all non-index mutual funds are not better than all index mutual funds. And we have not mentioned EFT's which are exchange-traded funds based on an index such as oil EFT, nasdaq biotech EFT etc. And then there are country funds such as Spain, Germany etc which are index funds. Certainly there are alot of investing strategies that might include these types of index funds. fwiw
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  #16  
Old 07-08-2005, 09:36 PM
Peter666 Peter666 is offline
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Default Re: Why Mutual Funds are better than Index Funds

Hi Midas,

I am referring to the Canadian Investment Fund which she took over in 1995. As it is a large cap value fund (by Canadian standards) I believe the comparison to the composite TSX/S&P 500 is legitimate. You can see all the funds she manages here:

http://www.cifunds.com/web/fund_mgr/...52&ltype=T

She uses a mathematical value approach to investing which produces good results whenever she either takes over or starts her own fund. There are other talented managers who do the same in Canada too.
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  #17  
Old 07-08-2005, 09:58 PM
Peter666 Peter666 is offline
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Default Re: Why Mutual Funds are better than Index Funds

Hi Wildwood,

I agree with everything you say including that a serious investor should look at and even purchase specialty index funds as part of their portfolio.

The purpose of my post is to show how many have prejudiced themselves against mutual funds, despite the fact that there are a number of them that consistently outperform their respective indexes in both interest returns and fluctuation.

I do not believe (as others assert) that consistently beating the index is just a fluke occurence and gives no indication of future performance.

I also understand that a successful fund will eventually outgrow the market, but one should still follow those managers as they create new funds, and listen to their advice.

Why people would invest in an S&P 500 index when you have Berkshire Hathaway B stocks, or some good mutual fund options is beyond me. Those who have indiscriminately invested in indexes thinking you can't do better are as big suckers as those who have purchased sub-par mutual funds.
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  #18  
Old 07-08-2005, 11:21 PM
Sniper Sniper is offline
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Default Re: Why Mutual Funds are better than Index Funds

[ QUOTE ]
Why people would invest in an S&P 500 index when you have Berkshire Hathaway B stocks, or some good mutual fund options is beyond me. Those who have indiscriminately invested in indexes thinking you can't do better are as big suckers as those who have purchased sub-par mutual funds.

[/ QUOTE ]

You have to remember that the uneducated (with regard to investing) masses may have no desire to educate themselves to find the better opoortunities, that doesn't make them suckers.

Also, even Warren Buffett has been quoted various times as saying that an individual inclined to do their own homework could easily outperform him, as they aren't constrained by the huge size of investments he must make.
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  #19  
Old 07-09-2005, 05:52 AM
DesertCat DesertCat is offline
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Default Re: Why Mutual Funds are better than Index Funds

[ QUOTE ]
For American investing, I like to compare the 40 plus years performance of Berkshire Hathaway to the S&P 500.

[/ QUOTE ]

Don't compare Berkshire Hathaway to a mutual fund. Buffett has never run a mutual fund and never will, as he feels they are greatly handicapped. In fact, don't you realize that Buffett recommends index funds to most investors?

The problem with mutual funds are they are constrained by their size, forced over-diversication, limits on investment types, a shareholder base that forces them to sell holdings at the worst possible times and their high fees and poor incentives.

You don't seem to understand much about Mutual Funds, or you have bought a line of bull that some mutual fund manager has sold you. They don't offer better down market performance. 20% don't beat the S&P 500 over reasonable time periods (5-10 years) it's actually closer to 5%.

And the very very few who do beat indexes over long periods, like Bill Miller, are great investors, but unlikely to repeat that feat because they grow too large and can no longer buy the most attractive stocks. The best ones (Sequoia) have already closed their doors to new investors. In Bill Millers case, he now is forced to buy companies with market caps that are at least a few billion, so he's being forced to buy only in the most efficient and highly researched parts of the market. His record the next ten years ain't going to match the last ten years.

Buffett used to kill the indexes, now he just hopes to beat them. He's dragging a huge anchor of size now. His advantage over mutual funds is he doesn't have to deal with redemptions, and doesn't need to be heavily diversified, and can invest without restriction in many interesting markets (junk bonds, currencies) when stocks are too expensive.

The best structure for investing is a private investment partnership that forces investors to stay committed for long periods of time, and rewards the managers for outperformance, not just breathing. Hedge funds typically have structures like that, though many also have fees that are too high.

As Buffett has said, if you understand value investing, and are a small investor, you should have no problems beating the indexes on your own. If not, buy an index fund.
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  #20  
Old 07-09-2005, 02:09 PM
Peter666 Peter666 is offline
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Default Re: Why Mutual Funds are better than Index Funds

First, I don't think you have read all the posts. Second I have provided examples of mutual funds that have soundly beat their respective index over a reasonable period of time. Third, Berkshire Hathaway despite its anchor has continued to cream the market, especially when the market turns ugly.

I agree that a smart investor will develop their own portfolio to beat the indexes, mutual funds and Berkshire Hathaway. But if you have invested in the major indexes like the S&P 500 (not the specialty ones discussed in a different post) thinking they are better than the two alternatives, you are an incompetent investor.
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