Outstanding Financial Pornography

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
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scomac
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Re: Outstanding Financial Pornography

Post by scomac » 11 May 2017 21:01

BRIAN5000 wrote:
11 May 2017 20:26
The outperformance of smaller sectors and the outsized contributions of a few stocks makes the case for active stock picking rather than passive investing, said Norman Levine, managing director at Toronto-based Portfolio Management Corp.

“People think that they get broad diversification by investing in an index. Instead, they end up owning a large number of stocks that have no meaning and a few momentum stocks,” Mr. Levine said in a phone interview. “This great love affair of ETFs that invest in the index is such a joke.”

http://www.theglobeandmail.com/globe-in ... 566/?ord=1
The issue isn't investing in an index. The issue is investing in a market that lacks depth and breadth as is the case in Canada and then exacerbating it by the concentration in cyclical commodity sectors.
"On what principle is it, that when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?"
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Re: Outstanding Financial Pornography

Post by BRIAN5000 » 12 May 2017 01:10

scomac wrote:
11 May 2017 21:01
BRIAN5000 wrote:
11 May 2017 20:26
The outperformance of smaller sectors and the outsized contributions of a few stocks makes the case for active stock picking rather than passive investing, said Norman Levine, managing director at Toronto-based Portfolio Management Corp.

“People think that they get broad diversification by investing in an index. Instead, they end up owning a large number of stocks that have no meaning and a few momentum stocks,” Mr. Levine said in a phone interview. “This great love affair of ETFs that invest in the index is such a joke.”

http://www.theglobeandmail.com/globe-in ... 566/?ord=1
The issue isn't investing in an index. The issue is investing in a market that lacks depth and breadth as is the case in Canada and then exacerbating it by the concentration in cyclical commodity sectors.
Got any evidence that active management is outperforming the Canadian index.
“Sometimes you are going to sell early and wish you would’ve held on, other times you will hold on a
little bit longer and wish you would’ve sold early - this is just part of the game.” - Frank Zorilla via Abnormal Returns

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scomac
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Re: Outstanding Financial Pornography

Post by scomac » 12 May 2017 07:55

BRIAN5000 wrote:
12 May 2017 01:10
scomac wrote:
11 May 2017 21:01
BRIAN5000 wrote:
11 May 2017 20:26
The outperformance of smaller sectors and the outsized contributions of a few stocks makes the case for active stock picking rather than passive investing, said Norman Levine, managing director at Toronto-based Portfolio Management Corp.

“People think that they get broad diversification by investing in an index. Instead, they end up owning a large number of stocks that have no meaning and a few momentum stocks,” Mr. Levine said in a phone interview. “This great love affair of ETFs that invest in the index is such a joke.”

http://www.theglobeandmail.com/globe-in ... 566/?ord=1
The issue isn't investing in an index. The issue is investing in a market that lacks depth and breadth as is the case in Canada and then exacerbating it by the concentration in cyclical commodity sectors.
Got any evidence that active management is outperforming the Canadian index.
Sure, there's lots of anecdotal evidence, be it Beat the TSX that David Thompson popularized on Canadian Moneysaver or Norm Rothery's Top 200 All-Stars that has been published annually on MoneySense, but that not the point. The point is that the Canadian market is imperfect versus the US market or broader EAFE markets. The more depth and breath that you have the more sense it makes to simply buy the total market and go along for the ride.

I can't speak for Levine. Maybe he truly believes that all passive investing is a fool's game. That wasn't made clear in the article you referenced, but that is often the case when an author is trying to make a particular point or incite a reaction. It's no different than cherry picking statistics to back up your position when the numbers used may not reflect the whole story. There are times to index and there are times that a different approach maybe beneficial. If it's only a small part of the total portfolio then the choice becomes largely irrelevant to long term results as the impact will be low one way or the other and there are always other factors that come into play, the most important of which is simplicity. Is one man's opinion pornography? I don't know. I guess that depends how much of a zealot you are.
"On what principle is it, that when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?"
Thomas Babington Macaulay in 1830

longinvest
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Re: Outstanding Financial Pornography

Post by longinvest » 12 May 2017 09:08

Scomac,
scomac wrote:
12 May 2017 07:55
Sure, there's lots of anecdotal evidence, be it Beat the TSX that David Thompson popularized on Canadian Moneysaver or Norm Rothery's Top 200 All-Stars that has been published annually on MoneySense, but that not the point. The point is that the Canadian market is imperfect versus the US market or broader EAFE markets.
On the other side of all the market beating investors (Beat the TSX, etc.) as a group, there must be losing investors; it just cannot be otherwise. These are not indexers who actually get market returns (minus a small fee; 6 basis points for VCN investors). I'm interested to know: who do you think are these losing investors?

Beating the market is a zero-sum game, before fees. (Of course, you know about Sharpe's proof which has been discussed in the past).
Bogleheads investment philosophy | Simple index portfolios | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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Re: Outstanding Financial Pornography

Post by kcowan » 12 May 2017 10:07

Most mutual funds are on the losing side. Various studies put the failure rate at 70+%.
For the fun of it...Keith

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Re: Outstanding Financial Pornography

Post by scomac » 12 May 2017 10:17

longinvest wrote:
12 May 2017 09:08
Scomac,
scomac wrote:
12 May 2017 07:55
Sure, there's lots of anecdotal evidence, be it Beat the TSX that David Thompson popularized on Canadian Moneysaver or Norm Rothery's Top 200 All-Stars that has been published annually on MoneySense, but that not the point. The point is that the Canadian market is imperfect versus the US market or broader EAFE markets.
On the other side of all the market beating investors (Beat the TSX, etc.) as a group, there must be losing investors; it just cannot be otherwise. These are not indexers who actually get market returns (minus a small fee; 6 basis points for VCN investors). So, who do you think are these losing investors?

Beating the market is a zero-sum game, before fees. (Of course, you know about Sharpe's proof which has been discussed in the past).
Brian asked for evidence that the Canadian market can be beaten with active management longer term. I provided that.

For every winner there has to be a loser. Not so fast. The math requires that when calculating periodic returns, but you really don't know who was on the other side of the trade and what the motivation was. This is particularly important in this day and age when an ever increasing amount of money is being passively invested. It can be as much about money flow in and out of the market as it is about strategy when we're looking at what is going on at the margins. It's entirely possible that both sides of a trade could make money due to different motivations and time frames. For example, a value investor buys 100 shares of ABC because it's cheap from a momentum investor who was shorting the stock that he had borrowed from an index fund. In that scenario two active managers made money on differing sides of the same trade. The loser was the passive holder over the time frame in question.
"On what principle is it, that when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?"
Thomas Babington Macaulay in 1830

longinvest
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Re: Outstanding Financial Pornography

Post by longinvest » 12 May 2017 10:57

Scomac,
scomac wrote:
12 May 2017 10:17
Brian asked for evidence that the Canadian market can be beaten with active management longer term. I provided that.
It's obvious that the market can be beaten. Mathematics and logic only tell us that beating the market is a zero-sum game, not that every single investor gets market returns (before fees).

The more interesting questions is whether it can be reliably beaten in the future. Everyone has his own opinion about that. :wink:
scomac wrote:
12 May 2017 10:17
For every winner there has to be a loser. Not so fast. The math requires that when calculating periodic returns, but you really don't know who was on the other side of the trade and what the motivation was. This is particularly important in this day and age when an ever increasing amount of money is being passively invested. It can be as much about money flow in and out of the market as it is about strategy when we're looking at what is going on at the margins. It's entirely possible that both sides of a trade could make money due to different motivations and time frames. For example, a value investor buys 100 shares of ABC because it's cheap from a momentum investor who was shorting the stock that he had borrowed from an index fund. In that scenario two active managers made money on differing sides of the same trade. The loser was the passive holder over the time frame in question.
You're trying to compare apples and oranges. Of course, if we are to compare investors in the same market over different time frames, then we'll be able to claim anything. We know that all TSX investors, as a group, lost 33% in 2008 and gained 35% in 2009. Saying that it was easy for a 2009 investor to beat a 2008 investor means nothing.

I'll illustrate a fair comparison with an example in my next post.
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Re: Outstanding Financial Pornography

Post by longinvest » 12 May 2017 12:28

Here's a fair comparison. We'll compare three investors in the Canadian market over the period 2002-2016 inclusively. One is an indexer (holding XIC), and two are active investors. One of the two is very good at shorting the market at the right times (2002, 2008, 2011, and 2015). The other is the one who buys the shorted stocks and sells them back.

XIC is allowed to lend a very small portion of its total holdings; we'll assume that this portion is the one borrowed by the shorting investor.

Over the period 2002-2016, the market (XIC) made an annualized return of approximately 7%. In the years 2002, 2008, 2011, and 2015, the market experienced losses of -14%, -33%, -9%, and -9%, respectively. These were great opportunities for our short seller. But, for him to make a profit, he needed the other active investor, a really bad market timer, to get into the market just in those years, and out of the market at the end of each of those years. Together, the two active investors got a cumulative 0% profit, before interest and fees. The XIC holder, on the other hand, got market returns minus fees, but plus a small lending profit.

In other words, shorting the market sums up to zero (before interest and fees) for the shorting investor and the investor on the other side of the short as a group. After interest and fees, it's a pure negative profit game, of course.
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Re: Outstanding Financial Pornography

Post by scomac » 12 May 2017 12:37

As per usual this sort of debate is a complete and total waste of time; my time at least. You can construct an argument with any set of parameters you choose to make your point. For every winner there must be a loser over a given time point. We have no way of knowing who that is and whether the wins are consistent or not, its simply hearsay without reportable data. So for that we turn to SPIVA and the like which clearly points out the futility of active management when that is being done by fund managers. This should be no surprise due to the cost hurdle that must be met. At the end of the day this is simply a matter of choice of strategy, financial laws be damned, because indexing is an active bet in it's own rite. Place your bets and take your chances.
"On what principle is it, that when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?"
Thomas Babington Macaulay in 1830

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Re: Outstanding Financial Pornography

Post by longinvest » 12 May 2017 12:50

Scomac,
scomac wrote:
12 May 2017 12:37
As per usual this sort of debate is a complete and total waste of time; my time at least.
All my apologies for having wasted your time.

longinvest
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Re: Outstanding Financial Pornography

Post by scomac » 12 May 2017 13:31

longinvest wrote:
12 May 2017 12:50
Scomac,
scomac wrote:
12 May 2017 12:37
As per usual this sort of debate is a complete and total waste of time; my time at least.
All my apologies for having wasted your time.

longinvest
You don't really mean that. You quite enjoyed the opportunity to test your mettle and I was a willing participant. A hat tip to you for winning the debate, but that doesn't change my contention that the Canadian stock market is a less than ideal candidate to choose to market index in regardless of what evidence you choose to provide.

Now, I don't expect to change your mind any more than you will change mine. We will have to agree to disagree on this. Getting back to the original question posed by Brian5000; he wanted proof and I provided some regardless of how you choose to frame it.
"On what principle is it, that when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?"
Thomas Babington Macaulay in 1830

longinvest
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Re: Outstanding Financial Pornography

Post by longinvest » 12 May 2017 13:47

scomac wrote:
12 May 2017 13:31
longinvest wrote:
12 May 2017 12:50
Scomac,
scomac wrote:
12 May 2017 12:37
As per usual this sort of debate is a complete and total waste of time; my time at least.
All my apologies for having wasted your time.

longinvest
You don't really mean that. You quite enjoyed the opportunity to test your mettle and I was a willing participant.
Yes, I enjoyed the argument, as I had to rework my example quite a few times to see clearly through the shorting of the market. Thanks for this.

On the other hand, I will try not to waste your time anymore, in the future, knowing that you don't consider these discussions worthwhile.
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Re: Outstanding Financial Pornography

Post by cashinstinct » 19 May 2017 08:33

CPP is a life annuity, Stronach reasons, and as soon as Matt and Linda’s tax brackets drop at the end of their working lives, it will be prudent to trigger this earned pension. “Delaying CPP after 65 could pay a 42 per cent bonus if they wait to 70, but it is a life annuity and ‘life’ is the key word,” he says. It’s a take the money and run concept keyed to mortality, Stronach reasons.
Take the money and run !!!

http://www.financialpost.com/m/wp/perso ... 2017-05-19

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Re: Outstanding Financial Pornography

Post by gaspr » 19 May 2017 12:11

cashinstinct wrote:
19 May 2017 08:33
CPP is a life annuity, Stronach reasons, and as soon as Matt and Linda’s tax brackets drop at the end of their working lives, it will be prudent to trigger this earned pension. “Delaying CPP after 65 could pay a 42 per cent bonus if they wait to 70, but it is a life annuity and ‘life’ is the key word,” he says. It’s a take the money and run concept keyed to mortality, Stronach reasons.
Take the money and run !!!

http://www.financialpost.com/m/wp/perso ... 2017-05-19
I am betting that Mr Stronach is being compensated using an AUM model...therefore conflicted advice.

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