Comments on: Why guru ETFs beat human gurus A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: ArCaMa Sat, 14 Dec 2013 16:35:35 +0000 “One common criticism of passive investing is that if everybody did it, then there would be no price discovery — and that the more passive investors there are, in a market, the easier it becomes to take advantage of them with a little bit of sophisticated analysis and/or activist investing.”

This is somewhat true, but more important is the quality of others that you are competing against. Even if the market is 90% passive, that share in a sense is immutable – they simply do not partake in price discovery. It is the other 10% whom you are competing against. You only “outperform” when you guess better than they do.

By: sacramentodan Thu, 21 Nov 2013 15:26:10 +0000 -wyatt-earp-effect/?utm_source=feedburne r&utm_medium=feed&utm_campaign=Feed%3A+T heBigPicture+%28The+Big+Picture%29

“In numerous studies (most prominently those by Edwards and Estes, as reported by Philip Tetlock in Expert Political Judgment), the stated task for observers was predicting which side of a “T-maze” held food for a subject rat. Unbeknownst both to observers and the rat, the maze was rigged such that the food was randomly placed (no pattern), but 60 percent of the time on one side and 40 percent of the time on the other.

The rat quickly “gets it” and waits at the “60 percent side” every time and is thus correct 60 percent of the time. Human observers, however, kept looking for patterns and chose sides in rough proportion to recent results. As a consequence, the humans were right only 52 percent of the time. They (we!) are much dumber than rats. Overall, we insist upon rejecting probabilistic strategies that accept the inevitability of randomness and error and upon rejecting the idea that randomness is a crucial component of our success (on account of self-serving bias, randomness is seen as only being behind our failures).”

Obviously, the best thing to do is look for a “rat” guru or better yet, a “rat” ETF…
More profound is that little thing of statistics and framing the question properly: out of all the mutual funds, how many would you expect to “outperform”?

“More to the point, the odds of such a streak happening are not actually all that long when the question is examined properly. As Leonard Mlodinow has explained, the proper question, given the number of mutual funds that have existed in the modern era, concerns the odds that any of them would have beaten the market over any 15-year period of time due to chance alone? That answer is an extremely surprising one: almost three out of four.”