hiriskpaul wrote:I used to think that private investors bought into active funds, despite the mounting evidence that this was likely to lead to under performance, because a) they were ignorant of the research and b) expert marketing. However, I now think there is another psychological aspect to it. Even if someone is fully aware of the research and sees through or is not influenced by the marketing, then they may still pick actively managed funds. That is because people are attracted by the possibility of beating the market, even if it is unlikely to happen over the long term. This is a good thing as an efficient market requires investors to behave this way. Someone has to pay for price discovery and those of us who buy market trackers don't contribute to this.
Investors who buy a market tracker will beat most of the investors who opt for the services of the Sharks, but the Sharks do provide the possibility of beating the market and for a lot of people, that is attractive.
The thing is that quite a few private investors have beaten the market consistently. We're our own fund managers. There were a lot of us back in the early 2000s on TMF who did quite a bit of work as a collective looking at small oil companies (I won't name names, they know who they are).
It wasn't too tough; there were companies whose shares were trading with implied prices for oil in the ground for a few cents per barrel when if they were bought in a trade sale the price would have been going for dollars per barrel. These price anomolies shouldn't have existed according to efficient market theory - but they did. So we made hay whilst the sun shone and boy did it shine for a few years. Apparantly we were "lucky". Me; I retired before turning 40, had I relied on passive funds I'd still be in work some 15 years later.
One advantage private investors who pick there own securities have is they don't pay management charges. Lesser researched areas, such as small caps, can and do produce far more anomalies than in the mainstream large/mid cap markets. I invest in distressed debt, which is another area that is often overlooked and can produce excellent risk adjusted returns. Part of the reason is because so many institutional investors become forced sellers once debt drops out of investment grade. Other reasons are hard to fathom, for example, the 2 Lloyds preference shares LLPC and LLPD have identical terms in all respects except one - LLPC pays 9.25% and LLPD 9.75%, yet for several years you could make risk free money by trading back and forth between them. Another example is the Santander UK pref SAN. The payout on this jumped by 11.1% after Osborne changed how dividends were taxed, but it took months for this to be reflected in the price.
But hey, if people are so desperate to "prove" that no-one can beat the market by skill then if that floats their boat go right ahead (it's nice to have competitors who don't think that it's worth trying). Academics have put in a lot of time trying to prove that no-one can consistently beat the market except by luck, then along comes the Buffett's, Fishers and others, which they have to ignore particularly since in order for their claims to hold they must accept Strong Efficient Market Theory (less strong versions mean that anomolies must exist which in turn can be exploited by some people)
I am not sure people are desperate to prove anything. Most academics seek to understand things, especially anomalies. Most (but not all) funds underperform appropriate benchmarks over the long term - this is a well established fact. Another well established fact is that fund performance is inconsistent such that it is not possible to gain an edge by studying a fund's past performance. You may not like either of these facts and may dispute them, but I have looked at the research and can find no flaws, nor any proper evidence that points the other way. Plenty of heresay and marketing material though.
P.S. The Superinvestors of Graham & Doddville, Buffett's 1984 lecture, pretty much demolishes the idea that no-one can beat the market by skill. But hey, if people want to think that he (and the group of value investors mentioned here) are just lucky, go right ahead.https://www8.gsb.columbia.edu/articles/ ... rinvestors
And as to people buying active funds, if you buy assets at a discount to NAV (as can often happen with investment trusts) then you can outperform the trackers if the discount narrows. And you're getting more income for the same money as the trackers (an important feature for some investors)
I don't think it is disputed that no-one can beat the market by skill. For fund managers to beat the market, other fund managers have to underperform the market as the market is largely owned by fund managers. The problem fund managers have, in mainstream large/mid cap markets, is there are too many skilled fund managers. Years ago there were far fewer skilled managers and large numbers of lesser skilled private investors who could provide the excess returns to the skilled managers. I remember reading a paper several years ago about an anomaly in either Korea or Taiwan (cannot remember which), were en-masse fund managers were beating the market. The conclusion was that there was a net transfer taking place from a large number of private day traders to professional fund managers. That just does not happen any more.
I agree with you about NAV discounts and ITs. ITs on large discounts should be able to beat trackers even if the discount does not narrow, as the additional return to shareholders through buybacks/dividends can wipe out the management fees. This trick does not always work though. I held Alliance Trust for many years due to the large discount and the fact I got reduced fees at ATST. Eventually a large activist investor came along and the discount closed, but this did not make up for the abysmal investment returns.
Absent individual security selection, a private investor has the choice between actively managed funds or tracker funds. Tracker funds are further divided into what I like to call market trackers (broad cap weighted) and various sub-sets such as large/medium/small caps, sector, value, growth, momentum, high yield, etc. I have been migrating out of active funds in the large/mid cap markets because all the evidence tells me that there is now too much skill in these markets, even in EM, so it is more likely than not that my fund picks will underperform market tracker funds over the long term. In other areas, such as small caps/AIM and private equity I stick with ITs (not that there is a choice).