16-06-2020, 11:56 AM
Investment is not only a skill but also a temperament. That's why many value investors say you either get it or you don't.
Being a skill means you have to practice, practice and practice. Temperament means you have to excercise control over emotions, anxiety, impatience and impartiality etc. But a lot of people focus on the skill rather than temperament. That's why you can have fundamental houses like Sequoia that couldn't make it after the founder passed on. Or hedge fund houses like Brevan Howard once the founder step down (and now returned). It is a real issue with Berkshire in my opinion.
Why is it surprising that retails don't do as well? I won't be surprised that those who cut their own hair during this COVID-19 period don't do it well either If you don't want to spend effort then it is better to just buy index funds. That's the gist of Buffett's recommendation though it has been twisted by ETF salesman. Like Karlmarx mentioned, there is no simple way, just like any disciplines. There are many grade 1 and 2 pianists but if you want to be grade 8, then it takes different effort. And you can't really pinpoint what is the most important part of the process of music making.
More surprisingly is why institutional investing don't do well. Besides fees and charges and cash drag in a inflationary environment, there is behavioral and institutional imperitives at work. There is conflict because job safety becomes a real concern because you are evaluated monthly, weekly or even daily. There is no incentive to make a long term contrarian call, similar behaviour to the Taiwan political landscape. The same person with MSCI as benchmark or SIBOR as benchmark will behave very differently. A hedge fund with 20% profit sharing will be more keen on short term profit rather than long term performances as the risk reward is skewed (hence a lot of hedge funds are actually beta funds, max out profit & risk to get max 20% profit sharing and if fail then just close and move on). As size increases, as Buffett mentioned many times, the amount to move the needle increases and you are stuck with the index stocks to generate small alpha... before fees. On AGGREGATE it is statistically impossible for funds to outperform the market. That's the point that Buffett is making with the $1m bet with the fund of hedge fund. One layer of fees is difficult enough...
But on individual basis or even good fund manager basis, it is not impossible. Actually Buffett already addressed this in his "masterpiece" of "Superinvestors of Graham & Doddsville". To follow up with what Karlmarx mentioned, I think there are odds; there's no "luck" per se. You can jaywalk 10k times and get hit once (the concept of 万一). That's not really luck, probably we shouldn't jaywalk in the first place, though there are known unknowns and unknown unknowns. Similarly what is the mortality (ie risk with ref to details like age and pre-existing condition) vs probability of contracting COVID (with ref to safe-distancing and mask wearing, hygiene etc) that policy makers will need to assess just like investors. It may sound morbid but similarly they have to assess whether it is worth $93billion. I have seen fundamental investors and speculative traders make money consistently that it's difficult to attribute to "consistent luck", albeit they have vastly different timeframes and techniques.
Good thing about ETF is that it does weed out the average long fund that are basically index trackers. The bad thing about ETF is that it is entering a euphoric stage just like every new products will go thorugh... to an extreme. Index compilers don't do fundamental research: they do structural research in terms of market cap, free float, ease of access etc. That means the large will become larger and the small will be neglected. That's basically what has happened in the past 10 years and also why value and small cap has been lagging. There is serious asset misallocation here. The capital market is no longer efficient in helping new and innovative companies raise capital. You have to be a start up unicorn to be noticed.
Over the long run, as many rational investors has realised, it is like a plane on autopilot guided by numbers-based indices as maps. With systematic and computer trading added in, the flash crashes are already symptoms of the underlying issues. There will be a day when the newest 737 MAX appear. Nobody knows when a bubble will pop but in my opinion most astuste observers are able to see when there is a bubble.
People have too much faith in tech and numbers. And I have been following / covering tech for almost 30 years, only to be called non progressive Only sailors fear the sea.
Being a skill means you have to practice, practice and practice. Temperament means you have to excercise control over emotions, anxiety, impatience and impartiality etc. But a lot of people focus on the skill rather than temperament. That's why you can have fundamental houses like Sequoia that couldn't make it after the founder passed on. Or hedge fund houses like Brevan Howard once the founder step down (and now returned). It is a real issue with Berkshire in my opinion.
Why is it surprising that retails don't do as well? I won't be surprised that those who cut their own hair during this COVID-19 period don't do it well either If you don't want to spend effort then it is better to just buy index funds. That's the gist of Buffett's recommendation though it has been twisted by ETF salesman. Like Karlmarx mentioned, there is no simple way, just like any disciplines. There are many grade 1 and 2 pianists but if you want to be grade 8, then it takes different effort. And you can't really pinpoint what is the most important part of the process of music making.
More surprisingly is why institutional investing don't do well. Besides fees and charges and cash drag in a inflationary environment, there is behavioral and institutional imperitives at work. There is conflict because job safety becomes a real concern because you are evaluated monthly, weekly or even daily. There is no incentive to make a long term contrarian call, similar behaviour to the Taiwan political landscape. The same person with MSCI as benchmark or SIBOR as benchmark will behave very differently. A hedge fund with 20% profit sharing will be more keen on short term profit rather than long term performances as the risk reward is skewed (hence a lot of hedge funds are actually beta funds, max out profit & risk to get max 20% profit sharing and if fail then just close and move on). As size increases, as Buffett mentioned many times, the amount to move the needle increases and you are stuck with the index stocks to generate small alpha... before fees. On AGGREGATE it is statistically impossible for funds to outperform the market. That's the point that Buffett is making with the $1m bet with the fund of hedge fund. One layer of fees is difficult enough...
But on individual basis or even good fund manager basis, it is not impossible. Actually Buffett already addressed this in his "masterpiece" of "Superinvestors of Graham & Doddsville". To follow up with what Karlmarx mentioned, I think there are odds; there's no "luck" per se. You can jaywalk 10k times and get hit once (the concept of 万一). That's not really luck, probably we shouldn't jaywalk in the first place, though there are known unknowns and unknown unknowns. Similarly what is the mortality (ie risk with ref to details like age and pre-existing condition) vs probability of contracting COVID (with ref to safe-distancing and mask wearing, hygiene etc) that policy makers will need to assess just like investors. It may sound morbid but similarly they have to assess whether it is worth $93billion. I have seen fundamental investors and speculative traders make money consistently that it's difficult to attribute to "consistent luck", albeit they have vastly different timeframes and techniques.
Good thing about ETF is that it does weed out the average long fund that are basically index trackers. The bad thing about ETF is that it is entering a euphoric stage just like every new products will go thorugh... to an extreme. Index compilers don't do fundamental research: they do structural research in terms of market cap, free float, ease of access etc. That means the large will become larger and the small will be neglected. That's basically what has happened in the past 10 years and also why value and small cap has been lagging. There is serious asset misallocation here. The capital market is no longer efficient in helping new and innovative companies raise capital. You have to be a start up unicorn to be noticed.
Over the long run, as many rational investors has realised, it is like a plane on autopilot guided by numbers-based indices as maps. With systematic and computer trading added in, the flash crashes are already symptoms of the underlying issues. There will be a day when the newest 737 MAX appear. Nobody knows when a bubble will pop but in my opinion most astuste observers are able to see when there is a bubble.
People have too much faith in tech and numbers. And I have been following / covering tech for almost 30 years, only to be called non progressive Only sailors fear the sea.