Author Topic: beating the market - not what it used to be  (Read 7838 times)

tede02

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beating the market - not what it used to be
« on: May 08, 2018, 07:38:32 PM »
I thought it was interesting when Buffett noted at the AGM that Ted and Todd have basically matched the S&P500 since inception. I continue to hear more and more managers talk about how much more competitive the investment game has become over recent decades. Munger has talked about it repeatedly. Bill Nygren had some interesting comments at a "Google Talks" event and another very successful fund manager I follow wrote about this in his 2017 annual letter. It really is remarkable how difficult it is to out-perform especially when you consider the virtually unlimited resources that some of these firms employ. It makes me think, what chance do I have? Then again, in a somewhat strange twist, it seems like the little guy probably does have some advantage comparied to the institutional constraints that exist with asset pools particularly above $1 billion. This subject has increasingly been on my mind. 


rb

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Re: beating the market - not what it used to be
« Reply #1 on: May 08, 2018, 09:07:57 PM »
With all due respect, and I really don't mean to be offensive. All that you've wrote is bullshit.

Firstly, value investors tend to badly in frothy markets. So in these times frustration is inevitable.

Secondly, by definition stock returns are lumpy. You don't get returns or out-performance on demand. And definitely not on your schedule that you can put neatly in a powerpoint.

Thirdly, the more things change, the more they stay the same. Value moves around and you just have to go where it is. In the 40s and 50s net-nets were awesome. In the 90s and oughts plenty of value in the small caps. In the early 2010s large blue chips were value as hell - easiest thing ever!.

In 2011-2012 I was buying Microsoft and Cisco around 8x earnings. I put 25% of the portfolio in Microsoft in the $24-$26 a share range and 15% of the portfolio in Cisco around $16-$17 a share. Now those thing are about 3x plus a load of extra dividends. Is that not out performance? We these names something that nobody knew they existed? No. The funniest thing is that around 2012-2013 I've read a J.P. Morgan research report in Microsoft where the analyst significantly raised the discount rate on Microsoft because the discount on the stock was so great that it wouldn't be possible.

Also while I picked Microsoft and Cisco, around that time I've strongly considered buying a lot of Google. At that point it was trading around 12x PE ex cash. I decided against it because I didn't think they could maintain attracting the level of engineering excellence they got in the past. Or some nonsense like that. Nonetheless it was on sale big time! Berkshire was selling around book or 1.1 book around that time.

So please tell me what amazing resources and technology do these supposed firms have today that they didn't have in 2012 and they weren't able to take advantage of bargains then but today they're scooping up all the value?

DTEJD1997

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Re: beating the market - not what it used to be
« Reply #2 on: May 08, 2018, 10:21:34 PM »
There is not a doubt in any fiber of my being that an INTELLIGENT, PATIENT, DISCIPLINED investor can beat the market averages.  I know they can do this over long periods of time too.  I personally know people that have done this.

There are also bargains to be had at almost all periods in time also.  Obviously, some times have more bargains than others, and some times are easy to operate in than others.

You can also do incredibly well just finding/executing 1 or 2 ideas a YEAR.

Of course, if you are limited to mega-caps and are managing  hundreds of millions or billions,your task is going to be that much more difficult.

Most of the time, you are going to have to deal in small/nano cap stocks...but not always.  There have been times where I've found nano-caps that are just "lead pipe cinches"....way better than buying Google at even 10X earnings even.

I've been investing for 25+ years.  I got started early in life...beating the market has always been difficult, but always possible.


rb

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Re: beating the market - not what it used to be
« Reply #3 on: May 08, 2018, 10:43:14 PM »

Of course, if you are limited to mega-caps and are managing  hundreds of millions or billions,your task is going to be that much more difficult.
What you are saying is true. The more pools you can wade in the greater the probability of finding bargains. That's just math.

But if you were to take Berkshire, most of their greatest hits Coke, Gillette, Wells Fargo, AmEx, BNSF, etc were large, well known companies. Nobody stopped anybody from from buying these firms. So these bargains were there for the taking. The takers just didn't show up.

Similarly when I was buying stakes in Microsoft, Cisco, Berkshire at ridiculous prices I'm sure some of the people I was buying from were some of these really sophisticated investors with supposedly really advanced capabilities. So I don't actually have such a high opinion of them.

One other I didn't mention in my original post. I don't think this obsession we have with beating the market is a good one. I know that as investors it is a way to measure how good we are. But it can become damaging. If you're really focused on beating the market, you'll start to try to do things to beat the market. That's not good. You should just try do your best to get good, safe returns. If they beat the market, that's great. If they don't, well... there are worse things in life.

tombgrt

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Re: beating the market - not what it used to be
« Reply #4 on: May 09, 2018, 12:32:35 AM »
RB summed it up nicely. I was in my early 20's in 2011-2012 and completely new to investing but even I could see BRK and MSFT were at a decade low valuation. In another thread I've said we will see this valuation gap for BRK again. Maybe as often as once every 10 or 15 years and despite the fact that BRK may have a $1T market cap by then. Human flaws don't go away completely because of the wisdom of the crowd, no matter how many people look at the problem at hand.

Prices aren't only adjusted by rational arguments (and sentiment) of market participants. Often, arguments are also made up to correspond with the current price. Positive and negative feedback loops then feed on themselves, sometimes driving valuations to extremes. As RB stated in the case of MSFT: "This can't be right. Better change my discount rate to make this work."

Look at oil today. Silly how the narrative changes.
« Last Edit: May 09, 2018, 12:42:35 AM by tombgrt »

Cigarbutt

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Re: beating the market - not what it used to be
« Reply #5 on: May 09, 2018, 04:33:05 AM »
“Beating” the market is not easy and IMO is not getting easier.

Need to have longer term retrospective tools to self-evaluate.

I would say that, in certain instances, short term thinking may “justify” taking on more risk in order to maintain one’s edge.

From my perspective, there is an increasing level of competition in many already crowded fields and many participants are bright, educated and sophisticated.

When it gets confusing, perhaps some time should be devoted to what one doesn’t know.

On a related note, many reasons contribute to the difficulty of maintaining one’s edge.

Size is one of them:
https://qz.com/1216260/warren-buffett-doesnt-beat-the-market-anymore/

IMO, holding BRK is a relatively easy way to “beat” the market going forward. Over time, however, I think that the edge will tend to get smaller and more difficult to maintain.

LR1400

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Re: beating the market - not what it used to be
« Reply #6 on: May 09, 2018, 05:48:45 AM »
Someone is beating the market. The growth guys are/have been beating the market. Value not so much. But there’s still a link between the two.

Pick your poison based on personality. Plenty have been successful both ways.

Another aspect is, we rarely know what individuals do unless they write a book or an article. From reading about some of the growth/momentum guys they are as conservative if not more conservative than many on this board.

Value makes intuitive sense, by so does a company that rapidly grows earnings over and over.
« Last Edit: May 09, 2018, 05:53:34 AM by LR1400 »

longinvestor

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Re: beating the market - not what it used to be
« Reply #7 on: May 09, 2018, 05:59:59 AM »
The “difficulty” with BRK’s beating the index over the past decade has pretty much to do with 2009. The index swung back +50% versus 30%. The self imposed 5 year rolling average comparison is washing off that delta as we speak.


no_free_lunch

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Re: beating the market - not what it used to be
« Reply #8 on: May 09, 2018, 08:04:37 AM »
I think it's a valid point, especially for us amateurs (assuming that's what you are).  Why spend the time if you can't beat the market?

People will tell you how they have beat the market and I am sure they have but when you look to audited statements, it is actually really tough.  Many of the managers I followed a decade ago haven't beaten the S&P or are neck and neck with it.

I think your best bet is to focus on a very small number of stocks and use index funds for diversification.  This is what I do.  I don't have hard and fast rules on the weightings but if I can't find a stock that I am confident will beat the index, I just buy the index.

Sharad

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Re: beating the market - not what it used to be
« Reply #9 on: May 09, 2018, 08:29:48 AM »
I think it's a valid point, especially for us amateurs (assuming that's what you are).  Why spend the time if you can't beat the market?

People will tell you how they have beat the market and I am sure they have but when you look to audited statements, it is actually really tough.  Many of the managers I followed a decade ago haven't beaten the S&P or are neck and neck with it.

I think your best bet is to focus on a very small number of stocks and use index funds for diversification.  This is what I do.  I don't have hard and fast rules on the weightings but if I can't find a stock that I am confident will beat the index, I just buy the index.

We small fish don't have to wade into the ocean, when there are plenty of ponds, where the trawler boats aren't in our way.

To beat the market, don't invest in the same spaces the big boys are. Find the short-term, one-off opportunities, find the small, obscure stock, and buy and hold for a really long time. Read everything you can about these investments, and know it better than everyone else. It's hard for the market to reach down to the small, obscure investments, because they are too small to move the needle. Understand the various investing accounts investors have in your country, and understand as much about tax law so you can earn returns efficiently. That's the edge smaller investors and hedge fund managers have.

Above all else, don't try to beat the market year-in and year-out. Just focus on the process and refine the process. Don't become outcome-driven.
"If we are not able to ask skeptical questions, to interrogate those who tell us that something is true, to be skeptical of those in authority, then we are up for grabs for the next charlatan - political or religious - who comes ambling along."
- Carl Sagan