tag:blogger.com,1999:blog-5465015914589377788.post3278922059352926781..comments2020-10-20T14:29:04.432-04:00Comments on Michael James on Money: A Financial QuizMichael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.comBlogger6125tag:blogger.com,1999:blog-5465015914589377788.post-52237020010674808622014-06-05T10:19:45.572-04:002014-06-05T10:19:45.572-04:00An anonymous comment seemed to get lost:
"Th...An anonymous comment seemed to get lost:<br /><br />"The math seems to make perfect sense. I question the conclusion, though. If the odds are 50/50 in any one year, shouldn't the results be that for every loser, there is a winner? My conculsion would be then that the winning percentages and the losing ones don't follow an arithmetic mean, but a geometric one, so that the NUMBER of winners and losers balance out. "<br /><br />The total number of dollars will balance out, but not the number of winners and losers. The reason for this comes from the fact that everyone with the same investments (but different amounts invested) gets the same percentage return, not the same dollar return. So once an investor gets a lead, that lead tends to grow; winners win by more than the amount losers lose.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-30379259400022901802014-06-05T09:56:30.056-04:002014-06-05T09:56:30.056-04:00The math seems to make perfect sense. I question ...The math seems to make perfect sense. I question the conclusion, though. If the odds are 50/50 in any one year, shouldn't the results be that for every loser, there is a winner? My conculsion would be then that the winning percentages and the losing ones don't follow an arithmetic mean, but a geometric one, so that the NUMBER of winners and losers balance out.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-9409071258503724142014-06-02T11:16:32.466-04:002014-06-02T11:16:32.466-04:00@Richard: The same logic works for the lottery. I...@Richard: The same logic works for the lottery. If you win, your winnings are very likely to be more than the cost of the ticket.<br /><br />The statistics of mutual funds relative to the index are affected greatly by fees. If we could enter a magical world where there are no fund fees, the outperformance of the lucky funds would look a lot better. Back in the real world it's still common for a few small funds to beat the market soundly over 5 years (although we can't identify them in advance).Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-60875964092854902912014-06-02T10:37:17.885-04:002014-06-02T10:37:17.885-04:00Wait a minute Michael, are you saying that if I pi...Wait a minute Michael, are you saying that if I pick individual stocks the amount I'm likely to gain is more than the amount I'm likely to lose? I'm off to sell my index funds now :)<br /><br />To be a bit more serious, one of the reasons I've stayed away from active mutual funds is that I've always had the impression that the ones that "beat the index" often did it by a small amount like 0.5% while the ones that fell behind could inflict permanent (relative) losses of 30% or more. But even if that isn't the case I have more than enough reasons to stay the course. Richardhttp://www.masteryourportfolio.comnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-23486219419919082922014-06-02T10:20:29.543-04:002014-06-02T10:20:29.543-04:00@Anonymous: I've tried to answer your questio...@Anonymous: I've tried to answer your question a number of different ways on this blog. Let's try a new way. Suppose that Amy averages 5% per year for 40 years, and that some losing Brads average 3%, and some winning Brads average 7%. Amy ends up with $352,000. The losing Brads end up with $163,000 ($189,000 less than Amy), and the winning Brads end up with $749,000 ($397,000 more than Amy). Even though the odds are about 50/50 in one year, it takes about two losing Brads to make up for one winning Brad over 40 years. Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-29924782765031036762014-06-02T10:07:09.620-04:002014-06-02T10:07:09.620-04:00For question 1, why is it that most random Brads w...For question 1, why is it that most random Brads will lose to Amy, and only a minority will beat her? I would have thought that, with random picks, it would be 50:50. I got the same answer as you though, based on the fact that at least Brad would not be paying the (small) MER. I do note that he would have a much higher volatility, with a concentrated portfolio. Anonymousnoreply@blogger.com