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Why brilliant people lose their touch
It hasn't been a great couple of years for Neil Woodford — and it has been just as miserable for the people who have entrusted money to his investment funds. Mr Woodford was probably the most celebrated stockpicker in the UK, but recently his funds have been languishing. Piling on the woes, Morningstar, a rating agency, downgraded his flagship fund this week. What has happened to the darling of the investment community?
Mr Woodford isn't the only star to fade. Fund manager Anthony Bolton is an obvious parallel. He enjoyed almost three decades of superb performance, retired, then returned to blemish his record with a few miserable years investing in China.
The story of triumph followed by disappointment is not limited to investment. Think of Arsène Wenger, for a few years the most brilliant manager in football, and then an eternal runner-up. Or all the bands who have struggled with "difficult second-album syndrome".
There is even a legend that athletes who appear on the cover of Sports Illustrated are doomed to suffer the "SI jinx". The rise to the top is followed by the fall from grace.
There are three broad explanations for these tragic career arcs. Our instinct is to blame the individual. We assume that Mr Woodford lost his touch and that Mr Wenger stopped learning. That is possible. Successful people can become overconfident, or isolated from feedback, or lazy.
But an alternative possibility is that the world changed. Mr Wenger's emphasis on diet, data and the global transfer market was once unusual, but when his rivals noticed and began to follow suit, his edge disappeared. In the investment world — and indeed, the business world more broadly — good ideas don't work forever because the competition catches on.
The third explanation is the least satisfying: that luck was at play. This seems implausible at first glance. Could luck alone have brought Mr Wenger three Premier League titles? Or that Mr Bolton was simply lucky for 28 years? Do we really live in such an impossibly random universe?
(Score: 5, Insightful) by RandomFactor on Sunday June 23 2019, @02:44PM (12 children)
with just 1024 fund managers, one fund each, and a 50% coin flip chance of beating the market
512 of them bet right year 1
256 of them bet right year 2
128 of them bet right year 3
64 of them bet right year 4
32 of them bet right year 5
16 of them bet right year 6
8 of them bet right year 7
4 of them bet right year 8
2 of them bet right year 9
1 of them bets right year 10
Additionally
- there's a lot more fund managers than that although i don't know how many more
- fund managers may be involved in multiple funds, increasing their odds of showing up as a 'winner' several fold
- by year 4 or 5 there are dozens of darlings and their odds go up simply because the market follows and mirrors their investments
- there are trends that take a number of years to play out, so a few solid long term bets can provide good returns for an extended period
- there's always a chance of being marginally effective, and also marketing can make those 4.01% gains in a 4% market into a win, so bump the odds up even more.
All told, yes it is entirely possible, and even designed, for there to be some long term winners regardless of other factors.
As a reminder: Active fund managers trail the S&P 500 for the ninth year in a row [google.com]
В «Правде» нет известий, в «Известиях» нет правды
(Score: 1, Insightful) by Anonymous Coward on Sunday June 23 2019, @03:30PM
Yea, it's just regression to the mean.
(Score: 4, Insightful) by Tokolosh on Sunday June 23 2019, @04:11PM (7 children)
(Score: -1, Troll) by Anonymous Coward on Sunday June 23 2019, @04:51PM (4 children)
You can do far better than index funds... You should be able to at least double your money every year if you know what you're doing.
(Score: 0) by Anonymous Coward on Sunday June 23 2019, @06:49PM (3 children)
It really isn't hard, all you have to do is pay attention and understand how the economy works (hint: we don't have capitalism).
(Score: 1) by Ethanol-fueled on Sunday June 23 2019, @08:12PM (2 children)
I knew a motherfucker who made and lost $100,000 day-trading because he didn't know when to quit.
A couple weeks ago, I came up 25 cents playing video poker at a casino, and the second I was ahead, I cashed out. When you suck at gambling, you should take what you can get.
(Score: 0) by Anonymous Coward on Sunday June 23 2019, @08:14PM
I wouldn't day trade, swing trading at least and stick to stuff you know. And that's how I treat those video poker machines too.
(Score: 0) by Anonymous Coward on Monday June 24 2019, @03:03PM
If you are truly gambling then you have an idea of the risk you are taking and the odds of being successful. Casino games (with the exception of the way some/many house blackjack games are run if one uses a card counting system) all have published odds which means you will lose and the house will win over time. Although whether you win or lose in a particular session due to luck. I have twice managed to take $5 and turn it into $50 when I cashed out, but I make no illusions that this was skill.
In day trading and other things listed above, there are elements of skill which can change the odds. It still doesn't mean that luck is not a factor. Day traders use strategies also. The question is if the marketplace they operate in is like Blackjack (where one might win consistently with an applied strategy) or Craps/Roulette (where the player will eventually lose regardless of strategy employed).
As if you didn't know those things.
(Score: 0) by Anonymous Coward on Sunday June 23 2019, @05:50PM
In general, yes, but there needs to be a rethinking of the underlying indices. Currently tech is in a bubble, valuations have skyrocketed, and the indices are based on market cap. Just under 30% of the SP500 is currently tech. Perhaps the metric should be earnings instead.
(Score: 5, Insightful) by digitalaudiorock on Sunday June 23 2019, @06:27PM
+10000 to this. Managed funds can have "expense ratios" (the percent they take out regardless of whether the fund goes up or down) of several percent (as much as 5) while an index fund will tend to be no more than about .1% or as low as .01% (with funds that have a larger minimum investment). So the managed funds have to outdo the market (and the index funds tend to just follow the market) by a lot just to match them, and almost never do. You don't hear this often because nobody (except possibly you) makes much money from them. In fact, a lot of fund managers put their own money in index funds...big surprise.
That very topic comes up a lot in this book [amazon.com], which is actually very good by the way.
(Score: 3, Insightful) by JoeMerchant on Sunday June 23 2019, @07:04PM
Like any form of gambling, stock picking involves a certain amount of skill to not just throw money away. However, once you get past that initial level of skill - it's mostly luck, and even people with the best skill can lose in comparison to random stocks picked from a reasonable list - it's done every year, and in the post-season analysis more than half of all "professional investors" fare more poorly than the various amusing random stock picking schemes.
🌻🌻 [google.com]
(Score: 5, Informative) by darkfeline on Sunday June 23 2019, @11:38PM (1 child)
As a followup to the ideas behind the parent post, I recommend reading A Mathematician Reads the Newspaper by John Allen Paulos, which covers some common mathematical slipups most people have.
Join the SDF Public Access UNIX System today!
(Score: 3, Interesting) by AthanasiusKircher on Monday June 24 2019, @03:36AM
Great book and recommendation. Even more on-point, try The Drunkard's Walk: How Randomness Rules Our Lives by Leonard Mlodinow.
It's specifically about how the mathematics of randomness leads to all sorts of apparent "patterns," including supposed "success" of stock managers, CEOs (who so often seem to take a golden parachute a few years after being hired for some amazing success at a previous company, which might have been luck), picking which blockbuster movies are worth their advertising budget (also a lot of luck), many sports achievements, etc.
Randomness has a lot more "streaks" (both good and bad) than most people realize. So many apparent successes are probably just misinterpreted patterns of randomness and chance. As for the likelihood of "improbable" events, keep in mind that every time you shuffle a deck of cards, you are creating an incredibly improbable event that wouldn't have happened before in the history of the universe even if it has been populated by oodles of civilizations who love to shuffle cards.
But mostly we don't ascribe significance to the unique outcome of the order of a deck of cards. If it were a lucky lottery pick, we might view it differently (even though picking the right megajackpot numbers are a lot more probable than that ordering of the cards you shuffled). We ascribe significance to many other things that are just as much a function of luck and randomness.