

The Best Investment Advice You'll Never Get... From Google - nreece
http://www.sanfran.com/content_areas/home/view_printable.php?story_id=1507

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mynameishere
I was promised "advice [I'll] never get" but I think we've all been hearing
about index funds for quite a while now. In fact, it's the current
conventional wisdom. Buying index funds is probably tantamount to betting on
the change in the GDP. The people who work in finance want nothing but
incoming money, low fees or high fees, and .23 percent of a trillion dollars
is still a pretty nice skim.

Well, the components of the S&P are publicly available: The most
mathematically sound thing to do (if you have 200K or more) is to buy a sample
(30 or more) stocks on the index through a broker, and your total costs will
be about 300 dollars. The one-time fee will be 300 / 200K = 0.0015 = .15
percent. Why aren't they recommending this course of action? Index funds are
good because they are "stupid" (because stupid is cheap)...but anybody can do
"stupid".

There is wealth to be extracted from people who think they are clever (but
aren't) and people who think they are dumb (and are). You can make very good
money on the market (1 percent a day or more) by buying on the noise. But this
depends on one thing: An upward trend, however small. That upward trend
depends only on money flows.

Re: Betting on the GDP. Notice the close similitude between the American and
Foreign trends:

[http://finance.yahoo.com/q/bc?t=5y&s=VFINX&l=on&...](http://finance.yahoo.com/q/bc?t=5y&s=VFINX&l=on&z=m&q=l&c=VGTSX)

...with one rather frightening difference. Obviously, they are reacting to the
same things, but one of them is looking unhealthy in a fundamental way.

My investment advice: Buy boxes of young, but good, wine. And cellar them.
Only do this, however, if you don't like drinking wine.

~~~
npk
"I think we've all been hearing about index funds for quite a while now."
Agreed.

"The most mathematically sound thing to do (if you have 200K or more)" your
basic assumption here is a problem.

Index funds allow you (well me, maybe you do have $200K) to invest a small
part of your income per month. That is a service, and obviously, I'm willing
to pay for it.

"Buy boxes of young, but good, wine." Apparently this is a good idea:
<http://www.wamllp.com/home.php>

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sanj
I've dabbled a smidgen in picking stocks and managed funds.

What I've realized is that I don't trust anyone with my money more than
myself. Feel free to blame hubris. The second-most-trusted entity for me is
"the market".

Lately I've taken that to an extreme, and I've even backed away from choosing
individual stocks. I've met multiple CEOs over years and a small fraction have
struck me as having any sort of intellectual horsepower.

Instead, I'm betting on my startup (as close to under my control as anything
can be) and retirement money goes into index funds.

I feel like this bounds the problem!

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Tichy
I can imagine that random picking equals any other strategy, but it seems to
me that the index fund thing can not be the ultimate strategy. Just imagine if
everybody would only buy index funds, it would not be a normally functioning
market anymore.

~~~
DaniFong
The article was seriously editorialized. For example, while Warren Buffett
tells newly minted rich people to invest in index funds, he tells aspiring
investors to gamble on their brightest ideas (and not their seventh), since
that's the one likely to make you rich. The article, of course, doesn't
mention this.

There's a philosophy he goes by: stick within your area of expertise. It's
done well for him, though it might not be quite so fun as trying your odds on
the market.

------
Hexstream
"a Minneapolis-based firm, the Leuthold Group, distributed a large poster
nationwide depicting the classic Uncle Sam character saying, “Index Funds Are
UnAmerican,” implying that anyone who was not trying to beat the averages was
nothing more than an unpatriotic wimp."

Patriotism is truly the lowest form of virtue... (or is it a virtue at all,
anytime?)

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marvin
I have been wondering about these claims that it is better to invest in an
index fund than in an actively manged one. Certainly, the statistics show that
on average, actively managed funds come out behind index funds. But the best
actively manged funds have been able to beat their indexes for at least ten
years, even in periods with negative growth.

Anyone else have any thoughts about this? It could, of course, just be that
the best funds happen to get lucky every year for a decade. But that seems a
bit simple to me, are there really statistical anomalies that are that big? It
seems to me that if you are going to pick an actively manged fund, you better
pick one which has a proven track record. Aren't most of these funds managed
by businesses not preaching too loudly about their past performance?

~~~
eric5179
You need to keep in mind that past performance does not always equal future
performance. This isn't just true of the stock market, but also in every
aspect of life.

I do agree that if you pick an actively managed fund picking one with good
past performance is safer than one with poor past performance.

My money will still be heading into index funds.

~~~
marvin
I've always figured that the "past performance, future performance" phrase
principally was just legalese, not investment advice. I'd like to see a study
on this.

On the other hand, it would be very interesting to see the "past performance"
of these J.P. Morgan whiz kids claiming that they always come out ahead of
their reference indexes. Past performance corrected for buyouts of successful
funds.

~~~
icky
> I've always figured that the "past performance, future performance" phrase
> principally was just legalese, not investment advice. I'd like to see a
> study on this.

You do realize that any such study would necessarily be based entirely on past
performance, and would not necessarily predict future performance. ;-)

See also: <http://en.wikipedia.org/wiki/David_Hume#Problem_of_induction>

~~~
marvin
It doesn't have to be entirely based on past performance - you could do some
statistical analysis on the number of funds, which funds are associated with
individual investors, fund returns and find whether the distribution of
returns overlaps with the distribution that says "the best funds were just
lucky".

What I am interested in knowing is whether the best investors are able to beat
the market over time. And there is a lot of anecdotal evidence that suggests
this, for example (a rather extreme one, though) the best hedge funds which
have generated an annualized 30% return over more than 15 years. With
especially high returns when the rest of the world is tanking. Although this
is an edge case, this kind of track record doesn't exactly scream "lucky".

~~~
icky
> It doesn't have to be entirely based on past performance - you could do some
> statistical analysis on the number of funds, which funds are associated with
> individual investors, fund returns and find whether the distribution of
> returns overlaps with the distribution that says "the best funds were just
> lucky".

Right, and as fast as you can generate that data, it immediately falls into
the category of "past performance". It's not a market problem, it's a
philosophy-of-empiricism problem. ;-)

> What I am interested in knowing is whether the best investors are able to
> beat the market over time. And there is a lot of anecdotal evidence that
> suggests this, for example (a rather extreme one, though) the best hedge
> funds which have generated an annualized 30% return over more than 15 years.
> With especially high returns when the rest of the world is tanking. Although
> this is an edge case, this kind of track record doesn't exactly scream
> "lucky".

Now, that part _is_ a market problem, and for that, "past performance" really
does come into play: are today's best investors universally superior market
animals, or are they just uniquely adapted to the current climate?

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vikas5678
I wanted to get better that investing, so I started off buying shares, some
through tip offs and then some through my own "research" on those companies,
and some did well and some didnt...to get a better hold of this, I read Peter
Lynch's books and basically, at the end of it all, the take home message from
those books seem to be: "Trust your common sense in the domain you work in or
are most informed about", "dont diversify" and "dont invest for short term
gains".

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vegashacker
FYI, this article is from December 2006.

