I'm a finance professional as well, and I generally agree with you. But every consumer has access to one piece of very vital non-public information, Namely, his or her's personal preference.
For example, say that I own a Tesla car, and think that it's pretty great. That's a very valuable piece of non-public information: I think Tesla cars are good. If one was to act upon this private information 3 or 4 years ago, they would have done very well indeed. Same with Google, or Amazon, or a multitude of other public companies.
I think people overestimate how difficult it is to make money in the public markets as individuals. Hedge funds, and especially mutual funds, are quite constrained in their ability to up size positions and put on profitable trades. They have redemptions, they have to hold assets in cash to liquidate shares (mostly this in a problem for mutual funds, not hedge funds), they might have to hold a long only portfolio (again, a problem with mutual funds, not hedge funds).
Individuals don't really have this problem, since they are managing their own money. If they want to put 50% of their capital into one name, no one is going to stop them. Moreover, they have full transparency into redemptions and inflows.
I have personally have done quite well with my own investments, achieving a better return than the firm that I work at. This has only been possible because I have complete insight into my risk tolerance, and don't have management and performance fees eating into my returns.
Another example. My wife's grandfather's wife in the early 2000s loved books and loved reading. Consequentially, she loved Amazon and what the company could provide for her. She convinced her husband to invest a sizeable chunk of their net worth (while not huge, was substantial, maybe 2 million) in one name, Amazon. They both dead recently, but the estate is very very valuable at this point, all because of that single Amazon investment shortly after they IPO'd.
Just because there are huge players in the market, doesn't mean an individual can't compete. In fact, individuals are probably in the best position to reap the highest returns from the public markets.
>I have personally have done quite well with my own investments, achieving a better return than the firm that I work at. This has only been possible because I have complete insight into my risk tolerance, and don't have management and performance fees eating into my returns.
How do you know it isn't just random luck? Same goes for your suggestions to invest in one "good" stock. Some will pick Amazon and profit greatly and some will pick AOL or Yahoo and be destitute. This is the whole point of diversification and the rise of index funds and I'm a little amazed to see a finance professional recommending things like this when studies repeatedly have shown that picking stocks does not work when you get a large enough sample size.
Historically, many funds made their bread on charging management fees for beta, and now that index funds can do the same thing but at a much lower price, they're going to go extinct.
I'm not suggesting that you put all of your money into one name, on the contrary, I think an index tracking ETF should make up the majority of one's portfolio. Maybe 20% should go into bonds or pure alpha and maybe 20% should go into 3 or 4 single name bets.
Institutional investors nowadays are doing something very similar. A core of their portfolio is now cost passive maybe with some smart beta tilt. The rest is allocated into bonds or pure alpha, whill a small portion is put into high conviction equity bets or hedge funds with beta exposure. This allows them to significantly reduce their management feels.
If you cite a few of the specific studies you're talking about, I'll be happy to explain why they're either 1) not actually concluding what you think they're concluding, or 2) simply incorrect. I can tell you very confidently that there is no academic consensus claiming alpha does not exist. It's rather the contrary, actually, and it's far more nuanced than your comment implies.
Outside of academic finance you can also find pretty obvious indications that alpna exists. Berkshire Hathaway has averaged about a 20% return between 1964 and 2018. Over the same timespan the S&P 500 averaged about a 7% annual return. Smaller funds have done even better than that.
When you actually do the math on some of these firms' performance, you see that the likelihood of their returns emerging by chance is too small to be explained by the number of hedge funds that has ever existed. There are funds which haven't lost money for 20 - 30 years, and whose returns are multiples of the market over the same time.
The question is not only whether alpha exists, though, but whether you can a) identify it, and b) access it.
Berkshire Hathaway’s stellar outperformance seems to have declined in recent years, right, and you and I can’t invest in Renaissance’s Medallion fund.
I’d concur that the individual investor has much more freedom in terms of basic asset allocation than most professional fund managers (except maybe hedge funds), but otherwise the general advice to go for a broad based index fund still stands.
Exactly. In 1999 I had enough money with AOL that I could have completely paid for my 4 years of college tuition. I knew nothing about financial markets or investing but I thought and was told that AOL was a good company.....obviously that didn't last.
> I'm a little amazed to see a finance professional recommending things like this when studies repeatedly have shown that picking stocks does not work when you get a large enough sample size.
If every financial professional believed that, there would no be finance professionals. With me maybe the quote is true "It's hard to make a person understand something when their job depends on them not." I work at a firm that tries to make money for their investors and if I believed it was impossible, I probably wouldn't be working for them in the first place.
In no way am I an unbiased commentator, my livelihood depends on me believing that I can be smarter, than I can be better than everyone else. And while most people can't, many people can. There are a handful of funds that have demonstrated significant outperformance over a long period of time. Funds like RenTech or Bridgewater.
A similar story: I bought AMZN because I thought the Kindle was amazing. I correctly foresaw that it would get cheaper and better (despite people sneering that $400 for the gen 1 was obscene and that they preferred paper), and that AMZN could become one of the biggest sellers of books just like AAPL became one of the leading sellers of music with the iTunes store.
At the end of the day though, I think I made money on the stock for other reasons (AWS; Prime; AMZN eating all of retail).
Similarly, your family member seems to have made a good bet for all of the wrong reasons.
Maybe, but delivering exceptional value in one area (books), is probably correlated to providing value in other areas (AWS, retail, etc).
You could imagine a similar situation with Google. You buy google stock because they created a really good search engine. But being able to deliver a great search engine also, it seems, is correlated to providing great advertising services, cloud computing, and email.
Being good at one thing is probably correlated to being good at other things (especially if they are related). While being bad at one thing is probably correlated with being bad at other things.
Exactly. It’s “Is your view of the product quality and it’s impact on the company, industry and stock market price better than the aggregate wisdom of everyone betting on it?”
Historically the answer is “Less than 49% of the time for most people, including professionals”
And yet...his wife's granny ended up investing a couple of mil in a stock priced in the single digits that is now worth over $1500/share. Don't overthink things.
Btw: if you actually knew what happened to the share price at that time (it was probably down 90% in a year) then you wouldn't call it anything other than what it is...a good decision.
For example, say that I own a Tesla car, and think that it's pretty great. That's a very valuable piece of non-public information: I think Tesla cars are good. If one was to act upon this private information 3 or 4 years ago, they would have done very well indeed. Same with Google, or Amazon, or a multitude of other public companies.
I think people overestimate how difficult it is to make money in the public markets as individuals. Hedge funds, and especially mutual funds, are quite constrained in their ability to up size positions and put on profitable trades. They have redemptions, they have to hold assets in cash to liquidate shares (mostly this in a problem for mutual funds, not hedge funds), they might have to hold a long only portfolio (again, a problem with mutual funds, not hedge funds).
Individuals don't really have this problem, since they are managing their own money. If they want to put 50% of their capital into one name, no one is going to stop them. Moreover, they have full transparency into redemptions and inflows.
I have personally have done quite well with my own investments, achieving a better return than the firm that I work at. This has only been possible because I have complete insight into my risk tolerance, and don't have management and performance fees eating into my returns.
Another example. My wife's grandfather's wife in the early 2000s loved books and loved reading. Consequentially, she loved Amazon and what the company could provide for her. She convinced her husband to invest a sizeable chunk of their net worth (while not huge, was substantial, maybe 2 million) in one name, Amazon. They both dead recently, but the estate is very very valuable at this point, all because of that single Amazon investment shortly after they IPO'd.
Just because there are huge players in the market, doesn't mean an individual can't compete. In fact, individuals are probably in the best position to reap the highest returns from the public markets.