I went to an investment advisor firm party for rich people

[jeff2]

You can not look at Alpha alone but in relation to Beta. A high positive Alpha with high Beta, especially during a good period, simply may mean it is taking on lots of risk. We saw this dramatically in some of the large tech AI-hyped stocks (that are the largest part of the S&P500), which had some of the largest losses in the recent tech swoon.

Twenty-five years is too long. It's meaningless, probably with different managers, etc. I evaluate over 3-5-10 years and follow Morningstar data and their Analysts' reports. I have a watch list in an MS portfolio of about 150 funds I monitor.

You say past performance does not assure future results, yet you rely on it when you favor an index fund, which is tossing your dart at that dartboard without evaluating the fundamentals of what you are buying.

I used to follow them in Canada. Often they were small or small/mid cap funds. Some of the managers were good at finding small resource companies. However, Mawer New Canada tended to avoid resource companies. They also closed their fund. Most of these small cap funds did not close and money poured in and it ruined it. Or the manger style goes out of fashion or the manager leaves. I did well with Sceptre Equity Growth and the MER was low for Canadian funds. I believe Resolute Growth had the best record in North America for a time.

 

[Zoot Allures]

You can not look at Alpha alone but in relation to Beta. A high positive Alpha with high Beta, especially during a good period, simply may mean it is taking on lots of risk. We saw this dramatically in some of the large tech AI-hyped stocks (that are the largest part of the S&P500), which had some of the largest losses in the recent tech swoon.

Agree.

For those following this thread, beta denotes the volatility of a security compared to the S&P 500 which has a beta of 1.0. Stocks with betas higher than 1.0 are interpreted as more volatile than the S&P 500.

Twenty-five years is too long. It's meaningless, probably with different managers, etc. I evaluate over 3-5-10 years and follow Morningstar data and their Analysts' reports. I have a watch list in an MS portfolio of about 150 funds I monitor.

Well , I see your point as managers and philosophy change, but I am just stating how long you have to beat the market to be statistically proven you can beat the market. 10 years does not cut it as there are so many funds a lot of funds will win over 10 years by mere chance, so how do you pick the winners if there even are any? What makes those funds winners? if it is not chance?

My thoughts are those funds that do have a solid 10 year record , by chance or not, are not picking individual stocks but a index of stocks with cetain factors IE momentum, large cap , undervalued etc and those factors will not beat the market over the longer term and will become high beta losers sooner than later as that is the history of such funds. I cannot conceive of any other way they can beat ther market so they have to be prescient to observe a change in the market that calls for a change in their methodology, in other words show such precience over many market cycles, about 25 years

And then there is Buffet who has beat the market over his very long career, well over 25 years,
by buying undervalued stock and holding, in other words creating a passive fund but Buffet does not suggest doing what he does, he suggests index funds esp S&P

You say past performance does not assure future results, yet you rely on it when you favor an index fund, which is tossing your dart at that dartboard without evaluating the fundamentals of what you are buying.

I see your point of throwing darts by investing in stocks you know nothing about, not even their name.

Still, I disagree. The S&P index and the rest have the entire history of the market behind them with
the S&P being the clear winner if you can accept its beta and downturns , if not put some of your portfolio in the money market

 

[Dave in Phoenix]

I used to follow them in Canada. Often they were small or small/mid cap funds. They also closed their fund. Most of these small cap funds did not close and money poured in and it ruined it.

A number of smaller cap funds I invested in were closed to new investors (existing investors could add more). But the reason was good. They had such a good track record money was pouring in, and the fund closed it since, with smaller caps, you can not be a huge fund and be nimble in the market. Being too big is a huge issue for a smaller-cap fund. The fund's own buying or selling can move the price of a fund. So these funds did the right thing even though they lost them, higher management fees, etc, if they grew bigger. They wanted what was best for fund holders, not the parent of the fund that gets profits based on the size of the fund. That is also why smaller cap funds have higher average expense ratios since they don't have economics of scale as the large cap funds. They pay their managers and analyst teams well for good performance but over a smaller fund size.

Sometimes, you get what you pay for versus tossing your dart at a cheap index fund. You can not buy an index directly.

By the way, some of the funds I own are employee-owned, and much of the compensation, even down to the analyst level, is based on performance relative to the relative index or category. Long-term small caps have outperformed large caps, but with more volatility.

You should also be diversified in different categories with allocations that change based on sector/category valuations, outlooks, effects on current expected overall economics, etc.

 

[jeff2]

A number of smaller cap funds I recommended years ago were closed to new investors (existing investors could add more). But the reason was good. They had such a good track record money was pouring in, and the fund closed it since, with smaller caps, you can not be a huge fund and be nimble in the market. Being too big is a huge issue for a smaller-cap fund. The fund's own buying or selling can move the price of a fund. So these funds did the right thing even though they lost them, higher management fees, etc, if they grew bigger. They wanted what was best for fund holders, not the parent of the fund that gets profits based on the size of the fund. That is also why smaller cap funds have higher average expense ratios since they don't have economics of scale as the large cap funds. They pay their managers and analyst teams well for good performance but over a smaller fund size.

Sometimes, you get what you pay for versus tossing your dart at a cheap index fund. You can not buy an index directly.

By the way, some of the funds I recommend are employee-owned, and much of the compensation, even down to the analyst level, is based on performance relative to the relative index or category. Long-term small caps have outperformed large caps, but with more volatility.

You should also be diversified in different categories with allocations that change based on sector/category valuations, outlooks, effects on current expected overall economics, etc.

It can be difficult to knock it out of the park in Canada. Our market is so much smaller and resource producers are generally for traders not investors. Great long term stocks such as Constellation Software are hard to find.

 

[Dave in Phoenix]

how do you pick the winners if there even are any? What makes those funds winners? if it is not chance?

My thoughts are those funds that do have a solid 10 year record are not picking individual stocks but a index of stocks with cetain factors IE momentum, large cap, undervalued etc and those factors will not beat the market over the longer term and will become high beta losers sooner than later as that is the history of such funds.

And then there is Buffet who has beat the market over his very long career, well over 25 years.

Still, I disagree. The S&P and the rest have the entire history of the market behind them, with
the S&P being the clear winner if you can accept its beta and downturns, if not put some of your portfolio in the money market

Funds can do well because of an analyst team that feeds the managers' recommendations. Analysts should be on quarterly earnings calls, asking questions and learning each company's competitive position in its industry. They also talk to company decision-makers about how they plan to increase profits and react to industry changes. It is about in-depth research to increase the likelihood of outperformance, not tossing darts at an index.

I do not own funds that have any significant investment in an index. There is a fund company noted for that (starts with F). Many of their funds are simply funds of funds. The fund you invest in or primarily invests in other F funds. Collecting double fees from both sides is a great gimmick, and evaluation is virtually impossible since we have to evaluate each of the underlying funds but can only buy them as a group - mix the good with the bad outlooks. Makes no sense to me.

You can not evaluate Buffet compared to the S&P500, which is an equity weighted dominated by large-cap tech stocks. The equal-weighted 500 index is a much better index for overall large-cap performance. But Buffet is a value investor so you can only judge him by various large cap value indexes I follow.

I have never followed Buffet, but I don't think he invests in indexes. I believe he is a deep-value investor, primarily in individual stocks. He and his partner, I believe, make the picks, not a deep analyst team and have done well, although I think they are lagging a bit now. Value is at extremes of undervaluation vs the large-cap tech sector with all the AI hype. But now, there is the realization that it will be a long time before profits justify the colossal cost to build and operate the vast data centers needed and the massive demand for power to run them. And the Deepseek little China company developing a far less expensive AI formula using less expensive chips.

Over most longer-term periods, money markets have been guaranteed losses - after tax and after inflation.

Also, "safe" LT US Treasury bonds lost 20-30% when the Fed increased interest rates to fight inflation as we emerged from the pandemic with massive supply chain shortages. I still would not invest in bonds due to their duration risk, with expected higher inflation and even higher interest rates if the tariffs stick.

 

[Dave in Phoenix]

It can be difficult to knock it out of the park in Canada. Our market is so much smaller and resource producers are generally for traders not investors. Great long term stocks such as Constellation Software are hard to find.

Good points. I forgot you're not part of the US yet. You have a very different story in Canada, and since regulation is by province, fund costs are much higher due to separate registration, legal and compliance costs than in the US.

Also, you have more resource funds, and we really don't need your dirty crude (no disrespect intended) in the US since we are now the world's largest oil producer, and refineries are at near capacity.

A bit off-topic but- With the slowing economies in Europe and much of the world and now with tariffs even worse the lower oil price (WTI/Brent) are due to slowing demand and OPEC wanting to take market share the crazy Trump mantra of "drill,drill, drill" is nonsense since no oil company is going to drill much more at our lower (down to around $60) prices it is just not feasible. We do not need more heating the climate change more oil in the US. Due to a lack of pipeline distribution, we do have to import some into the NE, but it is primarily balanced out by what we export out of the Gulf.

 

[jeff2]

Good points. I forgot you're not part of the US yet. You have a very different story in Canada, and since regulation is by province, fund costs are much higher due to separate registration, legal and compliance costs than in the US.

Also, you have more resource funds, and we really don't need your dirty crude (no disrespect intended) in the US since we are now the world's largest oil producer, and refineries are at near capacity.

A bit off-topic but- With the slowing economies in Europe and much of the world and now with tariffs even worse the lower oil price (WTI/Brent) are due to slowing demand and OPEC wanting to take market share the crazy Trump mantra of "drill,drill, drill" is nonsense since no oil company is going to drill much more at our lower (down to around $60) prices it is just not feasible. We do not need more heating the climate change more oil in the US. Due to a lack of pipeline distribution, we do have to import some into the NE, but it is primarily balanced out by what we export out of the Gulf.

Yes, we really need a National Securities regulator in Canada.
The fracking boom in the U.S. has been spectacular but a lot of refining is still set up for the dirty tar sands oil. Might take a bit of time to swich that over.
For fracking(shale), Rystad Energy put the break-even cost at US $62 when dividend payments and debt-servicing costs are included. S & P Global Commodity Insights last week said US $50 oil could cut back production by one million barrels a day.
OPEC is not as powerful as before, but they could flood the market again to try to take out the frackers.

 

[Dave in Phoenix]

Yes, we really need a National Securities regulator in Canada.
The fracking boom in the U.S. has been spectacular but a lot of refining is still set up for the dirty tar sands oil. Might take a bit of time to swich that over.
For fracking(shale), Rystad Energy put the break-even cost at US $62 when dividend payments and debt-servicing costs are included. S & P Global Commodity Insights last week said US $50 oil could cut back production by one million barrels a day.
OPEC is not as powerful as before, but they could flood the market again to try to take out the frackers.

All good points. Yes, we still have refineries for dirty tar sands, which we also get from shale.

But unless oil is like $100/brl I do not see adding more refining capacity. It takes years to build and is expensive for unknown demand or needs for more oil in 10 years vs. clean energy, which is booming now and often less costly than oil. We need and have plenty of oil as we slowly switch to clean energy, but it's not the long-term growth that most oil companies will spend the capital for new refiners or massive new drilling. Plenty of leases are available on private and Fed properties that are not being utilized now, and there is still plenty of production to keep up with decreasing oil demands.

I am referring to the US, and you know Canada far more than me!

 

[Zoot Allures]

I really do apprecate this discussion with you Dave as you are making me think.
This is not a debate to win it is a discussion to learn

A number of smaller cap funds I invested in were closed to new investors (existing investors could add more). But the reason was good. They had such a good track record money was pouring in, and the fund closed it since, with smaller caps, you can not be a huge fund and be nimble in the market. Being too big is a huge issue for a smaller-cap fund.

Same for any fund. The more money you have to invest makes winning harder not easier

The fund's own buying or selling can move the price of a fund. So these funds did the right thing even though they lost them, higher management fees, etc, if they grew bigger. They wanted what was best for fund holders, not the parent of the fund that gets profits based on the size of the fund. That is also why smaller cap funds have higher average expense ratios since they don't have economics of scale as the large cap funds. They pay their managers and analyst teams well for good performance but over a smaller fund size.

Sometimes, you get what you pay for versus tossing your dart at a cheap index fund. You can not buy an index directly.

By the way, some of the funds I own are employee-owned, and much of the compensation, even down to the analyst level, is based on performance relative to the relative index or category. Long-term small caps have outperformed large caps, but with more volatility.

You should also be diversified in different categories with allocations that change based on sector/category valuations, outlooks, effects on current expected overall economics, etc.

I will use another argument

To beat the market one needs to assume the market is not 100% efficient IE stocks priced exactly how they should be for Beta or risk

That the markets are efficient is demonstrated by your agreement that the vast majority of active funds do not beat the market. Why ? Because market efficiency, while not perfect, makes finding stocks that will beat the market very difficult to find

Here is a mind opening fact I discovered that changed my thinking which was similar to yours
- Only a very small percentage of stocks are winners with the majority being losers.

Examine any fund that beat the market, over any time period, and only a few of those stocks carried the majority of losing stocks

This means the market is not a winners game to win - IE picking the winners with extreme skill - it is a losers game to win - IE just do not do something stupid by picking nothing but losers

Because of market efficiency, it is extremely difficult to find those few winners.
Way more difficult than the average investor would presume, way, way more difficult.
That only makes sense when you think about it. If it was easy to pick the winners everyone would be doing it and the market would become perfectly efficient

When I realized this I was in disbelief but I faced the facts and dumped financial investors .

You are correct that an index fund carries losers but it also carries the small percentage
of winners while an active fund may be dropping the winners, not the losers.

You are assuming elite mutual funds can pick those few winning stocks while the majority of mutual funds cannot then you double the risk by saying those rarified funds - if they do exist - can be seperated from funds who have beat the market by chance .



It is the active mutual funds that are throwing the dart, not me. I buy index funds that guarantee I pick the few winners, active funds dart is more likely to miss the winners and strike only the losers.

There is no question, in my mind, that I am not throwing any darts with index funds as I am picking everything. It is actively manage funds that throw darts

Investment advisors are different than financial advisors. They quack the same but are different ducks. Investment advisors give advice, for a charge , and do not handle your money and that is where one should go for advice, not some financial advisor who wants your money

 

[Dave in Phoenix]

Investment advisors are different than financial advisors. They quack the same but are different ducks. Investment advisors give advice, for a charge , and do not handle your money and that is where one should go for advice, not some financial advisor who wants your money

In the US. You can not advise for any compensation about securities if you are not an RIA (Registered Investment Advisor) or an IAR (Investment Advisor Representative) under an RIA. With an RIA affiliation, you are under both the Best Interest rules and act legally as a fiduciary to the client. To be under an RIA you have to pass Series 65 (unless CPA or CFP, etc). If you are a CFP, you have to "act" as if a fiduciary, even if you are not legally one. There is a huge amount of disclosure required, primarily through Form ADV and the firm brochure (Form ADV part 2). RIAs must disclose information about their business practices, fees, conflicts of interest, disciplinary history, cybersecurity measures, and how they handle client information, including their privacy policy and business interruption policies. You have to pay fees to the SEC or State, depending on size, required education etc etc etc. Very highly regulated.

A "broker, technically a securities representative, can not give investment advice; can only sell products. Has to follow the same Best Interest rules and client suitability with lots of fees to FINRA, every state licensed in, required annual extensive education requirements, and has required expensive E&O insurance at least by most broker-dealers (under which a broker has to be licensed). Huge disclosure requirements, especially under Best Interest rules (Elizabeth Warren got passed since she thinks they are all crooks). For example, if you open a simple IRA account, you may have 72 pages of required disclosure. "Best Interest" is not as legally high as fiduciary, but it is close. FINRA is constantly auditing broker-dealers and heavily fines for minor paperwork issues, especially to be sure every rep is documenting in detail how their recommendations were in the best interest of the client based on their suitability, goals, risk tolerance, and financial condition (income, assets, holding period, prior investment experience etc etc.

Additionally, any actions taken by the representative on public media must be approved by compliance, including websites and approved social media platforms. All emails have to be routed via the B/D server using an approved email account and retained. No messaging services can be used unless allowed by the B/D and archived. This is an area where many of the large broker-dealers you are familiar with have received substantial fines for representatives using text messages in violation of FINRA rules.

Insurance agents have no obligation but, of course, can only sell insurance. For variable or indexed annuities, they must also hold a securities license and be subject to the broker's rules. Some State insurance commissioners have best-interest rules, but insurance representatives are only state-regulated for insurance licenses, compared to securities, which are both federally and state-regulated. Most states follow federal rules but conduct separate audits of RIAs, IARs, Brokers/dealers, and representatives. Additionally, states may audit individuals more frequently than the Federal Government (FINRA or SEC) for securities-related matters. However, it is easy to file a customer complaint with securities via FINRA and all hell can come to you by FINRA in arbitration hearings etc.