tag:blogger.com,1999:blog-8152901575140311047.post4489536279400226161..comments2024-03-28T12:49:46.624-04:00Comments on Musings on Markets: Transactions Costs and Beating the MarketAswath Damodaranhttp://www.blogger.com/profile/12021594649672906878noreply@blogger.comBlogger18125tag:blogger.com,1999:blog-8152901575140311047.post-49138879312837092362015-10-18T05:39:07.669-04:002015-10-18T05:39:07.669-04:00Another core reason is investor bias/irrationality...Another core reason is investor bias/irrationality. Often when a "formula" or "system" works, no matter what system it is, investors have a way of mucking it up by doing things that go against the strategy. They horde cash when they shouldn't, they fail to sell when they should, etc etc. Since a lot of strategies produce such a small amount of excess return, it's easy for a lot of investors to erode pretty much all of the excess return.<br /><br />You comments on stocks below $1 and large bid-ask spreads are more a concern for large money managers than small retail investors, though. I routinely buy & sell stocks below $1 that have a 25% bid-ask spread using limit orders and am able to buy for the quoted price on Google Finance. It's really a non-issue for small portfolios.<br /><br />EvanEvanhttp://www.netnethunter.com/benjamin-graham-still-relevant-or-a-complete-waste-of-time/noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-22235755560726387472014-01-23T02:35:09.237-05:002014-01-23T02:35:09.237-05:00This is why we have index funds.This is why we have index funds.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-79983365272123140732013-07-15T15:47:24.098-04:002013-07-15T15:47:24.098-04:00But surely the findings such as high dividend yiel...But surely the findings such as high dividend yield stocks, and low pe or ev/ebitda stocks will not fully lose out-performance over index wholly if you replicate as best as you can, and wait for a long period? That is, some of those papers did a cross-section of size as well (so ranked deciles of size) and there was still some out-performance over the index even in the top 4 size deciles. I think a Wesley Gray study did this, will have to look it up.<br /><br />Also, greenblatt is heavily promoting weighting indices by price-book or ev-ebitda. Is this also flawed? Adityanoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-18428840426489248262011-01-12T11:11:43.287-05:002011-01-12T11:11:43.287-05:00Hah! We've been beating the market and showing...Hah! We've been beating the market and showing this on the internet for the past nine years. We follow every stock recommendation with a buy and sell point. We even deduct 1% for transaction costs. Our average annual return for the past nine years is a whopping 27.0% vs. 2.2% for the S & P 500. For more info go to weimerandwirth.com Even though we have demonstrated this for nine years, few people know about us. We're not professionals. It's also possible that if we became more well-known the system might not work since it depends on buying microcaps.Unknownhttps://www.blogger.com/profile/08759184189549837369noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-86143060753316681602010-08-28T06:15:49.964-04:002010-08-28T06:15:49.964-04:00Have you seen the following paper?
"Best Ide...Have you seen the following paper?<br /><br />"Best Ideas"<br />http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1364827<br /><br />"We find that the stock that active managers display the most conviction towards ex-ante, outperforms the market, as well as the other stocks in those managers' portfolios, by approximately one to four percent per quarter depending on the benchmark employed. The results for managers' other high-conviction investments (e.g. top five stocks) are also strong. The other stocks managers hold do not exhibit significant outperformance. This leads us to two conclusions. First, the U.S. stock market does not appear to be efficiently priced, since even the typical active mutual fund manager is able to identify stocks that outperform by economically and statistically large amounts. Second, consistent with the view of Berk and Green (2004), the organization of the money management industry appears to make it optimal for managers to introduce stocks into their portfolio that are not outperformers. We argue that investors would benefit if managers held more concentrated portfolios."<br /><br />------<br /><br />I'd say that while transaction costs are definitely a factor, the real culprit is a combination of closet indexing and window dressing. Not to mention that ignoring the incentives for mutual fund managers to gather assets and how they gain those assets (hint: marketing) and then comparing their performance against the market is a straw-man argument. Plus, I thought the annual underperformance of mutual funds was pretty close to the average fee. What about the before-fee & after-fee performance of hedge funds? Would your argument still hold?Joshuahttps://www.blogger.com/profile/03529138057255648569noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-67500986553755736782010-02-27T12:56:24.911-05:002010-02-27T12:56:24.911-05:00Hi professor,
Thanks for your posts, I learn a lot...Hi professor,<br />Thanks for your posts, I learn a lot from them.<br />I´m very new to this financial themes, but I think that there are ways that can help in order to get covered when investing (principally in order to avoid loss from the spread in bid ask), like using hedge funds or working with options, futures or even making some currency arbitrage.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-54093348939028543902010-02-26T00:34:00.796-05:002010-02-26T00:34:00.796-05:00Hi Professor,
I agree with you that whatever the l...Hi Professor,<br />I agree with you that whatever the latest "hot" stock-buying strategy is always too good to be true. Even if it did work, people would catch on so quick and use it so much that the strategy would ultimately backfire on itself. <br /><br />However, just because a stock-buying strategy does not work for one time period doesn't mean that it is completely worthless. Finance is a constantly evolving field, and sometimes the errors are just as valuable as the "eureka!" moments. I feel that, as a community, the more errors we come up with that end up not working, the closer we can get to something that will work. (very optimistic viewpoint, I know)twilexiahttps://www.blogger.com/profile/03470851644541546611noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-10662311456111090562010-02-20T15:21:29.566-05:002010-02-20T15:21:29.566-05:00Does your blog have an RSS feed?Does your blog have an RSS feed?Unknownhttps://www.blogger.com/profile/01118944615427746265noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-18129598991597190102010-02-18T05:50:22.979-05:002010-02-18T05:50:22.979-05:00Markets are irrational, at least temporary (otherw...Markets are irrational, at least temporary (otherwise nobody would do the necessary analysis!). We all agree. But how to explain the performance difference of backtested strategies and real returns with irrationality? In my opinion these are two differenct aspects.<br />As i mentioned before backtesting is always subject to different problems (various bias, transaction costs etc.), which I see as the most important explanation of the performance gap.Fabianhttps://www.blogger.com/profile/08463619559246815317noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-23052008043262620162010-02-18T03:27:38.349-05:002010-02-18T03:27:38.349-05:00"...slip between the cup and the lip..."..."...slip between the cup and the lip..." Love the aphorism!Unknownhttps://www.blogger.com/profile/07316639871380978505noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-77702356747870852892010-02-17T10:07:41.338-05:002010-02-17T10:07:41.338-05:00Dear Sir .
In total agreement with you on the poi...Dear Sir .<br /><br />In total agreement with you on the point . I believe what makes it even tougher to stand by any strategy is the confidence of fund managers in there own strategy and they tend to sway away from it .Ankithttps://www.blogger.com/profile/04038724136774378284noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-68321016826539850102010-02-17T06:22:10.330-05:002010-02-17T06:22:10.330-05:00Its precisely because markets are irrational that ...Its precisely because markets are irrational that one needs to go back to basics time and again especially when the majority is proved wrong.<br /><br />Lets face it. Abnormal returns are an aberration and most often not the rule.<br /><br />The choice of the money manager is between normal returns on the strength of fundamental financials on one hand and abnormal temporary returns relying on a highly irrational market.Unknownhttps://www.blogger.com/profile/15140434534489973068noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-17157477141599071242010-02-16T23:15:24.609-05:002010-02-16T23:15:24.609-05:00Investment Fables was the first book of yours I re...Investment Fables was the first book of yours I read; then Investment Philosophies; and now I've started Investment Valuation. I'm starting to go down the behavioral route a la James Montier, but I do appreciate your scholarship and blog.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-71950183292920329732010-02-16T11:14:49.042-05:002010-02-16T11:14:49.042-05:00The usual straw man surfaces. Whenever there is ta...The usual straw man surfaces. Whenever there is talk about the failures of active money management, the response you get is that markets are not rational. But where in my original post did I even posit that markets were rational? In fact, I will accept your proposition that markets are irrational and investors are crazy. So, how do you explain the gap between promised returns and actual performance?Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-81338144951095523482010-02-16T10:37:27.949-05:002010-02-16T10:37:27.949-05:00Dear Professor
I absolutely agree with you. I wou...Dear Professor<br /><br />I absolutely agree with you. I would like to add two other aspects for lower real returns: First, backtesting strategies is subject to many problems; like the survivorship bias, look ahead bias etc. Second, defining an appropriate sample is not that easy (linked to an index? linked to a country? etc.). <br />I tested the "magic formula" from Joel Greenblatt for european companies (MSCI Europe as sample) -the result was: no significant return difference between the magic formula und a simple value strategy.<br />However, Greenblatt founded a company which offers everyone the possibility to invest according to the Magic Formula...Fabianhttps://www.blogger.com/profile/08463619559246815317noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-38252576104162179162010-02-16T09:04:30.971-05:002010-02-16T09:04:30.971-05:00Wow...So what do you think we should Mr.AJ? Throw ...Wow...So what do you think we should Mr.AJ? Throw out finance textbooks? or start them with the assumption that markets are irrational? If Markets are not rational and therefore not worthy, do we go back to barter system then? <br /><br /><br />"The market is certainly not efficient, if you define efficiency as an all-knowing, rational market, but it certainly seems efficient, if you define efficiency as investors being unable to take advantage of market mistakes."<br /><br />This is exactly the point about rationality. If you are smarter than all the investors of the world to understand that markets are irrational, who's stopping you from making money betting on the irrationality of the market?Mahesh Sethuramanhttps://www.blogger.com/profile/01909074683189926487noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-11289626992598739322010-02-16T01:17:22.035-05:002010-02-16T01:17:22.035-05:00I don't know about Fuller and Thaler, but the ...I don't know about Fuller and Thaler, but the average behavorial mutual fund is unable to provide abnormal returns. http://www.iijournals.com/doi/abs/10.3905/JOI.2008.17.4.082Roberto Ushisimahttps://www.blogger.com/profile/08096559859941617833noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-86908856521843352002010-02-15T23:29:24.201-05:002010-02-15T23:29:24.201-05:00So much finance is based on the rational markets a...So much finance is based on the rational markets assumption ... when everybody (almost) knows its not true ... u take that assumption out and there goes ure finance textbooks out of the window.AJhttps://www.blogger.com/profile/05681894544874580689noreply@blogger.com