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posted by Fnord666 on Sunday June 23 2019, @01:50PM   Printer-friendly
from the getting-lucky dept.

Submitted via IRC for Bytram

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?


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  • (Score: 5, Insightful) by RandomFactor on Sunday June 23 2019, @02:44PM (12 children)

    by RandomFactor (3682) Subscriber Badge on Sunday June 23 2019, @02:44PM (#859075) Journal

    Or that Mr Bolton was simply lucky for 28 years? Do we really live in such an impossibly random universe?

    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

      by Anonymous Coward on Sunday June 23 2019, @03:30PM (#859080)

      Yea, it's just regression to the mean.

    • (Score: 4, Insightful) by Tokolosh on Sunday June 23 2019, @04:11PM (7 children)

      by Tokolosh (585) on Sunday June 23 2019, @04:11PM (#859087)
      Correct. This is why index funds are the way to go. The exorbitant fees charged by these so-called genius stock pickers are not justified by their imaginary (long-term) outperformance. John Bogle recognized this a long time ago.
      • (Score: -1, Troll) by Anonymous Coward on Sunday June 23 2019, @04:51PM (4 children)

        by Anonymous Coward on Sunday June 23 2019, @04:51PM (#859098)

        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)

          by Anonymous Coward on Sunday June 23 2019, @06:49PM (#859120)

          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)

            by Ethanol-fueled (2792) on Sunday June 23 2019, @08:12PM (#859135) Homepage

            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

              by Anonymous Coward on Sunday June 23 2019, @08:14PM (#859136)

              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

              by Anonymous Coward on Monday June 24 2019, @03:03PM (#859364)

              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

        by Anonymous Coward on Sunday June 23 2019, @05:50PM (#859109)

        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

        by digitalaudiorock (688) on Sunday June 23 2019, @06:27PM (#859116) Journal

        +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

      by JoeMerchant (3937) on Sunday June 23 2019, @07:04PM (#859122)

      The third explanation is the least satisfying: that luck was at play.

      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)

      by darkfeline (1030) on Sunday June 23 2019, @11:38PM (#859187) Homepage

      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

        by AthanasiusKircher (5291) on Monday June 24 2019, @03:36AM (#859240) Journal

        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.

  • (Score: 1, Insightful) by Anonymous Coward on Sunday June 23 2019, @03:20PM (1 child)

    by Anonymous Coward on Sunday June 23 2019, @03:20PM (#859079)

    >This is not to say that skill doesn’t matter — merely that in a competition in which all the leaders are highly skilled, randomness may explain the difference between triumph and failure. Good luck plus skill beats bad luck plus skill any time.

    And that is a dangerous idea in our winner-take-all society. Yet we see it time after time in sporting events, the winner obviously won by luck. There is no surprise it carries over into business/ career.

    • (Score: 2) by Tokolosh on Sunday June 23 2019, @04:15PM

      by Tokolosh (585) on Sunday June 23 2019, @04:15PM (#859089)

      This may be true for any one competition. But as this demonstrates, over a significant number of contests randomness recedes and a winner emerges. That is why the baseball "world" series is played over seven games, after a long season of league competition. OTOH, the Superbowl is a single game and on the day any team can win, proving nothing.

  • (Score: 4, Insightful) by Gaaark on Sunday June 23 2019, @03:32PM (5 children)

    by Gaaark (41) on Sunday June 23 2019, @03:32PM (#859081) Journal

    Warren Buffet?
    He seems to STILL be doing well, last I heard.

    --
    --- Please remind me if I haven't been civil to you: I'm channeling MDC. ---Gaaark 2.0 ---
    • (Score: 2, Insightful) by Anonymous Coward on Sunday June 23 2019, @04:19PM (1 child)

      by Anonymous Coward on Sunday June 23 2019, @04:19PM (#859091)

      He doesn't regress to the general mean, Buffett regresses to his own.

      Since he is well-aware of his limits (he's the big "invest within your sphere of understanding" guy, he makes accurate estimations of his understanding a priority) and he's rather competent (not genius, but smart and incredible recall) and has resources (ie. he pays the right people to figure out the right things) he regresses to a market beating mean.

      Regression to the mean in the context of the individual is to the mean of their influences.

      You wouldn't for example expect a low-performing investor who chooses based on "how dynamic the company name sounds" (or on negatives, like "uptake of juicero machines in workplace staff rooms") to regress to the S&P.

      • (Score: 1, Interesting) by Anonymous Coward on Sunday June 23 2019, @08:03PM

        by Anonymous Coward on Sunday June 23 2019, @08:03PM (#859132)

        He does one thing anyone can do (i do and it pays well).
        Buy under valued companies that pay dividends that are not borrowing money to do so.

        He has the entirety of 2 insurance companies float to gamble with (which is his job). So he can even out his odds by doing what I just said above *alot*. Then doing this. If you have 10 million dollars and invest in 10 companies 1 million each. 95% of companies fail 5% do very well. Your odds are pretty good you will make money to cover the losers. He has the actuarial tables to back up his bets too. Insurance companies are very good at odds making because they know how to assign risk.

        For average investors (like me). I do not have enough float or information to play that sort of bet. So index funds are better for me. Which is why he recommends them.

        When the next recession hits (it will). He will be there to pounce on bargains. I will follow those bets. I have 3x'd my money I used doing so.

        The next recession will be interesting. I recently heard something interesting from a very smart banker. 'there is no liquidity in the bond market' That means if it freezes again the banks and companies can not borrow money quickly to cover. So the stock market will go down in that case. They will turn to investors like Buffet to cover.

    • (Score: 1) by khallow on Monday June 24 2019, @01:08AM

      by khallow (3766) Subscriber Badge on Monday June 24 2019, @01:08AM (#859198) Journal
      There's a variety of possible explanations that don't require skill at picking stocks, for example, arranging non-market support of his investments (such as government funding) or a very slow Ponzi scheme.
    • (Score: 0) by Anonymous Coward on Monday June 24 2019, @04:19AM (1 child)

      by Anonymous Coward on Monday June 24 2019, @04:19AM (#859250)

      Warren Buffet is an outlier of outliers. Most people can't even emulate his diet and stay alive and active for long much less 88.

      https://www.businessinsider.com/eating-like-billionaire-warren-buffett-diet-2017-10/?IR=T [businessinsider.com]
      http://fortune.com/2015/02/25/warren-buffett-diet-coke/ [fortune.com]
      https://www.cnbc.com/2018/04/18/warren-buffett-buys-breakfast-from-mcdonalds-for-under-3-point-17.html [cnbc.com]
      https://www.businessinsider.com/wells-fargo-ceo-warren-eats-a-full-meal-2014-9/?IR=T [businessinsider.com]

      No, Buffett explained, “If I eat 2700 calories a day, a quarter of that is Coca-Cola. I drink at least five 12-ounce servings. I do it everyday.”

      I checked the actuarial tables, and the lowest death rate is among six-year-olds. So I decided to eat like a six-year-old.

      He's probably been drinking cola and eating McD for decades.

      • (Score: 0) by Anonymous Coward on Tuesday June 25 2019, @09:05AM

        by Anonymous Coward on Tuesday June 25 2019, @09:05AM (#859650)

        Donald Trump and Warren Buffet live by the same diet and mental age? :)

        Now all we need to do is determine what makes one a DINO and one a RINO outside of what party was most convenient that year :)

  • (Score: 5, Insightful) by bzipitidoo on Sunday June 23 2019, @04:14PM (10 children)

    by bzipitidoo (4388) on Sunday June 23 2019, @04:14PM (#859088) Journal

    Winning in the stock market is like winning in most games with an element of chance. Luck can help, but discipline, training, and skill are more important.

    The way a lot of people play the stock market is to move with the herd. Do that and you end up buying high and selling low, the exact opposite of what you should be doing. Takes discipline to resist all the "advice" to buy into the latest hot thing, to be skeptical of all the urgency that this is a once in a lifetime opportunity and if you don't move, quick, you'll miss out, etc. There are a lot of scammers in the finance biz who dress in nice suits and talk softly and with seeming great authority and knowledge, aren't so raw and obvious like the typical 419 email from Nigeria, but they are nevertheless scammers.

    • (Score: 3, Insightful) by shortscreen on Sunday June 23 2019, @04:42PM (2 children)

      by shortscreen (2252) on Sunday June 23 2019, @04:42PM (#859094) Journal

      The only.. winning move is.. not.. to play.

      (alternatively, gamble with other people's money instead of your own, and/or get a bailout when you don't win)

    • (Score: 2, Insightful) by Anonymous Coward on Sunday June 23 2019, @05:19PM (5 children)

      by Anonymous Coward on Sunday June 23 2019, @05:19PM (#859106)

      Perhaps the whole concept of gambling with the world economy is just a terrible idea.

      • (Score: 0) by Anonymous Coward on Sunday June 23 2019, @07:34PM (3 children)

        by Anonymous Coward on Sunday June 23 2019, @07:34PM (#859125)

        You are aware that finance doesn't happen because evil people conspire against you the commoner, aren't you?

        The entire house is built on the time value of money and estimations of risk, and we all participate.

        • (Score: 0) by Anonymous Coward on Sunday June 23 2019, @11:19PM (2 children)

          by Anonymous Coward on Sunday June 23 2019, @11:19PM (#859180)

          That's a great platitude. Too bad it's totally false for 90% of people.

          • (Score: 0) by Anonymous Coward on Monday June 24 2019, @01:12AM

            by Anonymous Coward on Monday June 24 2019, @01:12AM (#859199)

            No we all are 'all in' at this point. Wither you like it or now.

          • (Score: 0) by Anonymous Coward on Monday June 24 2019, @03:46AM

            by Anonymous Coward on Monday June 24 2019, @03:46AM (#859243)

            I don't know if you live in a cave, but everyone else works with finance on a day to day basis. From what your insurance company thinks they need to charge you to cover your mishaps, what your credit card company wants in exchange to hand you money you might not pay back, to whether a bank is going to give you money so that you can get your masters in fine liberal arts. Perhaps even how much a bank is going to compensate you for letting them have your surplus cash.

            It all works because professionals participating are intelligent and don't want to risk money for less than it's worth.

      • (Score: 1) by khallow on Monday June 24 2019, @03:13AM

        by khallow (3766) Subscriber Badge on Monday June 24 2019, @03:13AM (#859230) Journal

        Perhaps the whole concept of gambling with the world economy is just a terrible idea.

        A terrible idea that has brought increased wealth and better lives to many billions of people worldwide. Can't have that happen!

    • (Score: 2) by krishnoid on Monday June 24 2019, @12:30AM

      by krishnoid (1156) on Monday June 24 2019, @12:30AM (#859193)

      Luck can help, but discipline, training, and skill are more important.

      "Luck favors the prepared." . So once you have the discipline, training, and skills, you're better able to take advantage of the luck when it shows up, if the saying holds.

  • (Score: 5, Insightful) by Mer on Sunday June 23 2019, @05:05PM (3 children)

    by Mer (8009) on Sunday June 23 2019, @05:05PM (#859102)

    The article's not about brilliant people, it's about successful people (who may or may not be brilliant).

    --
    Shut up!, he explained.
    • (Score: 3, Interesting) by inertnet on Sunday June 23 2019, @10:55PM

      by inertnet (4071) on Sunday June 23 2019, @10:55PM (#859174) Journal

      Indeed, you can also be successful just by following strict rules, like some people did using the famous Turtle Rules [tradingblox.com]

    • (Score: 2) by Thexalon on Monday June 24 2019, @03:19AM (1 child)

      by Thexalon (636) on Monday June 24 2019, @03:19AM (#859233)

      And the simplest proof of that difference, available to most of us, is to have any kind of contact with the upper management of your firm.

      It's not even limited to business: When I worked for an academic institution, I had to work directly with one PhD wielding person and couldn't help but conclude that she wasn't particularly smart. To summarize her entire body of work: "If you're doing something, and it hurts, stop doing that, and if you don't recover reasonably quickly go to the doctor."

      --
      The only thing that stops a bad guy with a compiler is a good guy with a compiler.
      • (Score: 0) by Anonymous Coward on Monday June 24 2019, @03:57AM

        by Anonymous Coward on Monday June 24 2019, @03:57AM (#859246)

        I had to work directly with one PhD wielding person and couldn't help but conclude that she wasn't particularly smart.

        Who spends 7 years in effective slavery, unless you have a good chance for an academic position, or you just need to get that degree because you're the last one in your family who doesn't have one yet?

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