Here are some articles that caught my eye this past week. Topics include: Dart throwing monkeys, 2014’s top face-palm worthy moments and more.
No Monkey Business? – The Economist Blog
“In a study Robert Arnott and his co-authors picked 100 portfolios, each with 30 equally-weighted stocks from the 1,000 largest American stocks by market capitalization. 94 of the 100 “dartboard portfolios” did better than a market cap-weighted portfolio of all the 1,000 stocks.”
There are 2 things a fund’s performance is compared to at the end of a year. The fund’s benchmark index and, perhaps more insultingly, the legendary “dart throwing money” – which is used to represent a truly random choice.
Maybe we were giving the fund managers too easy of a target by just a market-weighted index as a benchmark. Maybe instead they should strive to be as good as a dart throwing monkey.
A few studies have compared the results of market cap weighted index to a “dart throwing monkey”, and found that a dart throwing monkey wins hands down not only to just an average fund manager, but also a market cap weighted index.
“Similarly, in another study Andrew Clare, Nick Motson and Steve Thomas randomly picked American stocks to construct ten million indices. An additional twist to their experiment was that the stocks were also randomly weighted. Nearly all of the ten million “monkey indices” delivered “vastly superior returns” compared to a cap-weighted index.”
We briefly discussed the underperformance of market cap weighted index funds to equal weight funds in our fund spotlight series here: www.begintoinvest.com/fund-spotlight-series-guggenheims-equal-weight-index-funds/
This is a topic I want to explore further on Begin To Invest. Market cap weighted averages have the unfortunate side effect of most heavily weighting the stocks that may in fact be the most overvalued. Do the low cost of these funds make up for potential under performance? How have equal weighted (or random weighted as discussed in the article) fared over much longer periods historically? I plan on researching this topic much more and posting the results on here.
Wall Street’s Worst Calls of 2014 (So Far)
“According to the monthly surveys conducted by Bank of America Merrill Lynch, Wall Street’s best and brightest (and their counterparts elsewhere around the world) came into the year heavily bullish on the Tokyo stock market and loaded up to the gunwales with Japanese stocks…. So far this year, Japan is by far the worst-performing major stock market.”
If you needed any other additional reasons to turn off the TV and tune out the predictions of “experts” look no further.
Those on Begin To Invest’s email list (you can sign up off on the right hand side or at the bottom of this post) have received, or will in the next few weeks an email of some of the all-time worst calls made by some of the most famous investors featured on channels like CNBC and Bloomberg and the plethora of financial websites. I wrote the email not to try to prove how dumb people are, in fact I know I would not do any better. But instead I wrote the email to help give you the confidence to manage your money on your own and give you the confidence to ignore the talking heads.
Economic Week in Review – Vanguard
A nice short and sweet review of the week’s news from Vanguard.
Even though attempting to trade stocks around economic data such as this futile, I believe that new investors need to know what can move the markets as part of a general improvement in financial literacy. This article does a great job explaining key data sets and explaining what they mean for the economy.
Quietly, the U.S. economy has had one of the best 4 months in job creation seen in the last 15 years and the unemployment rate has continued its slow decline:
2013: The Year that wasn’t (and was) for active management – Vanguard
“But even though active managers were planting seeds in seemingly fertile soil, many still struggled to beat their benchmarks. According to data provided by Morningstar, only 48% of active managers of diversified fixed income funds outperformed in 2013. The record of active stock-fund managers was similar, with 50% beating their indexes.”
This record is a little better than the long term average, but still leaves a lot to be desired.
This is another brief article discussing the challenges with active management, and what investors can do to improve their odds of outperformance when selecting active funds.
A slightly shorter weekend reading than usual. I have spent the majority of my time working on social media sites like facebook and twitter. If you don’t follow Begin To Invest on either of those sites, you are missing out as I publish content 5-6 days a week on those outlets.
That’s all for this week. Happy investing!