tag:blogger.com,1999:blog-5465015914589377788.post8567560463853090339..comments2024-03-20T09:32:16.592-04:00Comments on Michael James on Money: The Incredible Shrinking AlphaMichael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-5465015914589377788.post-73977364321626961492018-01-22T13:13:56.014-05:002018-01-22T13:13:56.014-05:00They do have an advantage but like a 15-year old w...They do have an advantage but like a 15-year old who got a car for their birthday it doesn't mean they can use it :)<br /><br />I may have seen some of those articles. I believe they relied on indexes to show the natural result that an index will give the average of the performance in the market it covers -- so it's still impossible for the average in that market to be better than the index.<br /><br />I would still expect that if there is an opportunity to outperform it's most likely to be at the extremes. There are stocks so small that they aren't in any index. There are countries that individual investors can only access by opening a brokerage account with a firm in Hong Kong (blocking out many small investors), where some stocks are too small to be worth the trouble for medium- to large-scale investors (blocking out all professional managers).<br /><br />Is the nearest available index an adequate stand-in? Maybe, but at some point there are too many indexes to call it a passive choice.<br /><br />That doesn't mean in any way that everyone can outperform the market. But it doesn't always come down to having the most research or assets.<br /><br />Disciplined decisions are a challenge for both amateur and professional investors. Being able to say "no" to something that's almost good enough but not quite, or something that seems very urgent and contradicts your long-term strategy, may be the most important factor in getting better performance.<br /><br />The market does seem to reliably transfer wealth from the less disciplined to the more disciplined whether that's in sticking to an allocation of index funds or picking stocks.Richardnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-56937395671538599262018-01-22T10:56:09.519-05:002018-01-22T10:56:09.519-05:00@Richard: Swedroe has written many times about ho...@Richard: Swedroe has written many times about how active stock-pickers fare in more difficult markets, such as very small stocks or foreign stocks. The answer, invariably, is not too well on average.<br /><br />As a whole, investors with less assets don't have an advantage. It's only investors with the skill to produce alpha who are better off investing smaller sums. So, for the thundering herd, a smaller portfolio doesn't help.<br /><br />As I understand it, the decline in individual investors came initially from people shifting into mutual funds instead of picking their own stocks. The rise of ETFs has mostly taken assets away from mutual funds that are "closet index funds" charging high fees.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-25991396404324795942018-01-22T10:14:40.078-05:002018-01-22T10:14:40.078-05:00While I generally agree, the way "the market&...While I generally agree, the way "the market" is defined may be too simplistic.<br /><br />If you define investable assets as the ones that everyone is paying attention to, then it naturally follows that everyone is paying attention to them.<br /><br />However that leaves out anything that investors (professional or otherwise) have decided is too hard to understand, too small, or too hard to access.<br /><br />These could be unpredictable businesses, smaller stocks that don't have a total potential large enough for active fund managers, or foreign countries where it's difficult to get access through a broker.<br /><br />Of course they do have risks. But I don't think anyone is claiming alpha has to be risk-free.<br /><br />The one rule that is more true than ever is that having more assets makes it harder to find good opportunities. It seems that individual investors would have one advantage over fund managers there.<br /><br />On a side note it would be really interesting to see whether the decline in individual investors is mostly due to a transition to index funds.Richardnoreply@blogger.com