I'd be willing to bet that Bayshore, for all its clever investment strategems and financial experts and so forth, will underperform a simple stock market index fund in the long run.
- empirically incorrect (the idea that very few people beat the index)
- but repeatedly constantly with unbelievable confidence by people who don't know the subject well
- while misunderstanding the reasons why someone with that level of wealth wouldn't want to buy the index even if it gave them statistically good returns
Yep, definitionally 50% of stock market capital outperforms the market index average. People recommend index because you don't know who / what will outperform (funds will charge you fees like 1% so random dart choosing a fund means on avg. you get market index - 1%).
Even without that, still no. There is an implicit assumption in your math that bad and good investors aggregate funds in the same amount. They don't.
And, depending on exactly how strictly you are defining EMH - I mean, does anyone believe it in it's strictest form? It's a crazy idea.
50% of of returns, over all investors, beats the median (not average) returns over all investors, by definition, but the annual median returns over all investors is much smaller than the average annual index return. A very small number of people/investors (1) have beaten the average annual S&P returns over the long term.
(1) https://www.amazon.com/Four-Pillars-Investing-Building-Portf...
Empirically incorrect? The 'index fund strategy' stated under another name is essentially the same as efficient markets theory, which multiple economists have won Nobel Prizes for. This is mainstream economic theory today.
But even worse - to my knowledge even skeptics of efficient markets theory don't deny that few people beat the index. They think they can pick them of course - but they never claim that most people outperform the market (the same thesis, restated).
So your comment is, bluntly stated, empirically incorrect, because no serious academic (to my knowledge) denies that very few people beat the index. The reason incidentally is because index funds have zero fees, and active investors have nonzero fees, and long term they converge - so the zero fee lower cost basis strategy wins out. And if you're claiming that average investors with "zero fees" generally outperform the market... that is empirically, provably, incorrect.
Stated with unbelievable confidence... yes, the confidence that the papers that the economists who won those Nobel Prizes instilled, which has now become economic orthodoxy, which also helped spur the creation of index funds in the first place.
There is a strong connection between efficient markets theory & those funds very existence: because if active investors underperform the market, then the best strategy is just to hold the market, a strategy which got repackaged and named as 'index funds.'
A good book on the topic:
https://www.amazon.com/Trillions-Renegades-Invented-Changed-...
Yes but you can't pick the winning monkeys in advance, can you? Picking winning monkeys is just as hard as picking winning stocks.
* Achieve the mean
* Add some kind of noise to that
You have a chance of beating the mean.
But I think when people say "beat the market", they mean a better than 50% chance due to some secret sauce.
Or, beat the market repeatedly, which variance is unlikely to do (if chance of beating the market one year is 50%, chance of beating it 10 years running is only ~0.1%)
To be fair, EMH is mainstream econometrics from the 70s...
I don't think there exist more than a handful of academics in 2020 that would defend a strong form of EMH.
The whole current quantitative finance industry is based on the factor model theory, and behavioral finance.
Factors have been proven to S3account for consistent abnormal returns for decades, on multiple asset classes.
Stronger than factor form of inefficiencies, such as PEAD, have also been common knowledge for decades.
Behavioral finance, for which there has been Nobel prizes as well - post 70s :) - would even go as far as telling you that there is most likely a self realization effect of factors in the market. Eg. "Quality exists because people trade quality because they believe it exists"
The commenter is almost certainly stating they think Bayshore has <50% chance, but not some tiny number. Most people on stating "i'll bet x" intend for such bet to be priced at even money. If they stated they were laying generous odds, that might imply with confidence. And it might still be reasonable because it is reported widely, and people like Warren Buffett have won bets by betting on such underperformance. No one is saying that no one beats the market.
Buffett himself has said that upon his death there is a fund for his widow which will be 90% sp500 index. I'm not sure how much we are talking about, and it will be less than $100 billion, but I'm not sure it makes much difference, if any.
You might disagree with someone like Buffett on things like this, but the idea that the original comment is naive or stupid is plainly wrong. He's basically repeated what one of the best investors on the planet has stated.
Is assume you'd have non-negligeable effects on what you invested in/effects in the intermediate levels (like putting too much money through the order book)? S&P 500 market cap is 32 trillion. 100 billion is 0.3% of that.
You don't invest your money in what has the highest return. You invest it on what has the risk profile of your liking.
The (stock) market is considered risky, both in terms of volatility (~15-20% annual), and in terms of exposure.
Most quant hedge funds target ~10% realized annual volatility as a sweet spot for most investors.
I read no such thing, but I have practical real world experience speaking to and reviewing investment decks for institutional investors, ranging from pension funds to insurance companies, banks and funds of funds.
And these are what we call "non sophisticated investors". Yet even at that level, none of them would just "do anything" or "just look at returns".
The idea that "we are the smart money" at places like you mention isn't accurate. Almost every single person at an insurance company, bank, fund of funds, pension fund wishes they were at the VC, PE, Hedge fund etc who is actually doing the investing. But they can't get a job there.
You are mixing investors (the one having money to invest) and investment managers (the ones having an investment product).
The objective function of both are very different, because an investor accumulates multiple investment managers in its portfolio.
An investment manager can be very focused on a single purpose, because ultimately he will sell his investment strategy to an investor that will blend him with others in his portfolio to respect his risk profile.
We are talking about investors here, not investment managers.
> The idea that "we are the smart money" at places like you mention isn't accurate
That's not what I said. I'm working in the asset management side, and I was talking about investors.
To rephrase, I said that even non sophisticated investors have an understanding of what is a risk profile, what is an exposure, what is risk parity, and overall efficient frontiers.
> Almost every single person at an insurance company, bank, fund of funds, pension fund wishes they were at the VC, PE, Hedge fund etc who is actually doing the investing. But they can't get a job there.
That's just a demeaning, simplistic, blanket statement. Not even worth arguing that.
Most non sophisticated investors have no clue what risk parity or efficient frontiers are. "Risk profile" and "exposure" are used in various contexts by different folks. Only people from a quant background would think something like this. That isn't a shot at quant, but it's a very specific lens through which to view or do investing.
Fair or not, folks making investment decisions (ie the folks at PE, VC, hedge funds) have little respect for the people at pension funds, insurance, fund of funds etc. It might not be fair, but it's largely true. And it's largely true that one side wishes they were the other.
Because it is in total contradiction to what I see on the field...
I started to reply to your comment but stopped as I can hardly agree with any single sentence you wrote.
Concrete example - Bill Ackman hasn't ever thought about "risk parity". The average small value fund hasn't ever thought of it. Activists dont'. PEs don't. VC's haven't even heard of it. PE and VC also think of their investors as "LPs", not investors.
As for who wants to work where... this is anecdotal but have you ever heard of someone at a PE/VC/HF say "I would really like to work at CALPERS/CPP etc"? I have not