bolu's comments

This reminds me of YC's "Apply without an idea" experiment. Both experiments seem to arise from a innovator's insight that a whole class of otherwise highly qualified candidates self select out because of a self perception that they don't "fit the mold". This is especially true of YC, where there are so many articles every day that tell the story of a founder who "saw a problem, and set off on this quest to solve it" that people who don't have an idea on hand when YC applications come up can immediately self exclude. Never mind that many great founders pivoted more than once on their way to success.

I'm excited to see this experiment "meet the marketplace", and see what pans out. Given the small number of PhD students these top programs take each year, just yielding one or two great people into the PhD program that otherwise wouldn't have applied seems like it'd really move the needle.

[Disclosure: I went to undergrad with Jeff and we're good friends. He really is a great "mold-breaker" himself and I'm excited to see how a great "hacker of systems" in the best sense of the word changes academia during his career]

Active investors of all kinds definitely try, but again as a whole they've failed. I'll try to dig up the data and put it into an article sometime, but the fallacy that you should just pick a hedge fund and it'll outperform via market timing or securities selection is false.

And of course, as for picking the "right" fund which will subsequently do that - well that's the hard part.

Thats true, but we must remember that for folks who _did_ try to time the market many will have actually had negative returns because of failing timing attempts. For example, there was a massive outflow of funds from Equities after the most recent correction (as there usually is when the market performs badly), and those people who pulled out of equities did not get to participate in the record-setting rebound that happened soon after.

Comparing performance over any given time period to some arbitrary standard (in this case, "flat" is assumed to be bad) doesn't tell the whole picture. On the flip side, there are many instances where funds performed admirably but in a time when the markets as a whole did even better. Just as I wouldn't commend a fund for gains in a bull market, docking a fund or portfolio for being "flat" when the market as a whole was flat over the given time period is unfair.

I don't doubt that your company has outperformed (after all, you have the data and I don't). But for what it's worth, was it a slam dunk to assume 40 years ago that your company would have outperformed over the subsequent 40 years? That's the problem: picking winners before they're winners. Will you outperform for another 30 years (my own investment horizon?). Hard to tell.

Your point about the single month as the timing period is definitely valid - in hindsight the article would have benefitted from having that be maybe 6 months or 12 months instead.

The premise isn't as clear-cut as what you laid out, in my opinion. In general people do start with the best of intentions; that is, their time horizon when they buy is usually something like "until I need the money". But, that's the generic case under stable market return conditions. In times of panic, folks who thought they were okay with risk find out they're not okay with it, and pull out (usually after much of the panic has already passed). In boom times people start to, like you said, "move money between funds" usually in a way that follows the recent price increases (gold recently, tech in 2001, etc). It's these movements that the article is written against - and you're right, it would have benefitted from a longer time series of returns.

Indeed, if you remember the oft-quoted Nasdaq Composite Index from the dot com boom - the level in 1998 was the same level as in 2002, but in the interim investors as a whole lost billions. That's a lot more than would have been lost if people had just regularly been investing the same amount each month into their 401(k), which is what we wish would have happened.

You've pointed out the exact nature of the problem. They made a killing that day, and they probably will continue to make a killing as long as naive investors believe they can beat the market (whether with timing, or security selection, or both).

The only way around this is to educate investors about things like this. Because let's be honest: those guys at Wealth Magazine (at least the ones running the place, I presume) know full well their customers are wasting their money. But the fact is, it's revenue for them, and as long as that spigot is still flowing no way are they going to bite the hand that feeds them.

It's a conflict-of-interest situation, rather than a lack of knowledge on the part of the folks selling these financial services. You can be sure the guys (and they're usually guys) at the top aren't buying funds based on advice from Bill Cosby (no offense to the actor's other skills).

They're both part of the same story: that individual investors are bad at this, and professional managers aren't any good at it either.

Fair point though, that was definitely a conceptual leap of some distance there between the two.

The skill vs. luck argument is actually better investigated by looking at a separate data set: that of the persistence of performance over time for the same manager. We'll do a story about that sometime in the future.

Good question. The inflow/outflow data is from the ICI (Investment Company Institute - a consortium of fund companies) and is dollars in/out which is independent of asset performance.

Indeed - yet individual investors try anyway, and the futility of this is all we're trying to point out.

You're right that the article should have been more clear - it's looking at retail investors specifically (in your example; Person2), which is the audience that FutureAdvisor focuses on. It's not focused on other actors in the market such as Institutional Investors, Hedge Funds, etc (you could see those other actors as Person1 and Person3, in your example). You are completely right that if you don't look at the market from any individual perspective there is no inflow and outflow, especially if keeping money in cash is still counted as "in the market".

If we say Person2 is the aggregate of all retail investors, then you have money flow. Person2 in your example has a $100 outflow from Equities and a $100 inflow to Tbonds.

The reason we chose to focus on retail investors and look at money flow from their perspective is to focus on a phenomenon that we see among individual investors, that of moving their money around in the market based on perceptions of the near future, and showing that the data shows this doesn't work.

Because we used the inflows & outflows of a couple large retail mutual funds as proxy for investor demand, you're right that the story actually is "retail investors are bad at timing the market".

There's a whole other set of data to dive into whether or not professional managers as a whole are bad at market timing (spoiler: they are terrible at it), but you're right in that this is not what this data set addresses.

Really the point the article is making is that on the whole, you and I, the investing public, shouldn't try to "read the tea leaves" and pull our money in and out of the market / move money around in the market because of what we believe will happen in the near future. What this data proves is that this doesn't actually work.

Good data for the performance of hedge funds as an asset class that account for survivorship bias is somewhat hard to find. Off hand, Swensen in "Unconventional Success" recounts that for a single decade period that he was looking at, third quartile managers matched the market before fees. So after the standard hedge fund fees investors in those funds underperformed the market by about 1.6% (in his specific decade-ending-dec-2003 time series example).

Looking backwards, you can always identify fund managers that beat the market, but only in hindsight. One big part of this that's left unsaid is that yes it's possible to find managers to beat the market in hindsight, it's finding these managers ahead of time that's difficult & unlikely. Coupled with how much you'll trail the market if you try and don't succeed in finding outperformers ahead of time, it's a bit of a losing game to try.

There's an entire other field of study about the persistence of performance, but suffice to say that looking in the rearview mirror for last decade's outperformers doesn't help you find the next decade's outperformers.

Well, just like the average retail investor buys last year's hot mutual fund in the hopes that (usually lucky) outperformance persists, institutional investors also got sold the "look how well my fund did last year" spiel.

But before we think to ourselves "I'd never do that - I know that past performance doesn't have predict future returns..." look at the performance of the super popular Fidelity Contrafund (FCNTX) vs the S&P over the last ten years:

60.09% FCNTX 13.58% .INX (S&P500 Index)

You know that investors every day are being sold this fund using this stat, and (the data shows) buying it.

The Emperor of All Maladies - spectacular journey into the history of the disease. Filled with great human stories of discovery, and also taught me a ton about the currently understood biology of cancer.

You're absolutely right, and I agree with your advice. Also contributing to your 401(k) - assuming your options aren't terrible - is in the same realm of advice.

We should have been more clear - this particular post is all about security selection for the individual investor, i.e. "I have this much money to put into my IRA and what should I buy" type questions.

Great feedback.

On the brokers front: we're working diligently on that, and should have many more brokerages supported soon. We'll post something on our blog, or if you'd like I can drop you a note personally (just let me know your email: [email protected])

It's not neglect - honest. It's just trimming the feature set so that we could get to launch and get in front of real customers and start to get valuable feedback which would directionally guide the product. Students, both those starting out and those already investing, is on our list of folks we want to support.

You can actually use the product today to "play around": just put in your age when you graduate, and what you think you'll be making. The projections are admittedly pretty sensitive, especially when you're young, but it should give you a good overview.

Any and all feedback always appreciated. [email protected] is me. Thanks, -Bo

You probably won't need it, unless you're doing something significantly more complex than the fundamental buy-and-hold index investing strategy.

I'd just use market orders all the time except I'm a little freaked out about momentary (on the order of minutes) market freak-outs as happened a couple months ago. Limit orders priced at the current price (or 1 cent higher) is pretty much just my way of enforcing a sane market order.

It's because the fees charged don't appear as a line item on your statement. It's probably the only thing most American families spend more than a $1000 a year on (I did the math), for which they get no documentation... not even a receipt.

Can you imagine how different the world would be (and how much less Fidelity would make) if you had to pay fees out of pocket? A single piece of simple legislation that disallows silently deducting fees from your assets would be all it takes.

My co-founder and I sometimes sit at dinner thinking that if we do nothing else for the world but make fees (both expense ratio and more subtle ones like turnover-induced tax hit) more tangible, then we'll have succeeded.

Sigh... so true. I only wish the economics were different. If, like Fidelity, you extract a ton in fees it allows you to swamp the airwaves with marketing dollars. And the folks who just keep their heads down and do their jobs, well, don't have as much money to run ads. And in this market, unfortunately, because few people understand it deeply ad dollars can move the needle. Unfortunate, to say the least.

This is not even considering the who commissioned-advisor problem.

They're good - gotta watch out for your effective expense ratio, which is the amount of commission you pay for the trade (depends on your brokerage house and the ETF) divided by the years you plan to own it, added to the ETF's own existing expense ratio. So net net, buy in larger chunks, or find one of the no-commission-ETF houses.

Also, and it sounds like you are, you need to be familiar / comfortable with limit orders or market orders. That sometimes can scare folks who are used to not-very-time-sensitive daily-priced mutual funds.

Makes sense, though it's probably a correlation to the root source of outperformance, which is being an index fund. Cheaper funds tend to be index funds, index funds tend to outperform, thus cheaper funds end up outperforming more expensive (usually more actively managed) funds. One of the seminal studies on this is http://www.firstquadrant.com/downloads/How_Well_Have_Taxable...

What's more, the more expensive (again usually actively managed) funds tend to have high turnover, and turnover implies a huge tax penalty for taxable investors in taxable accounts. So if anything, the winnings of lower-fee index funds are understated, as turnover-generated tax hits are not disclosed well.

I agree with the author completely - hopefully more disclosure, legislated, would entice more people to shop for lower-fee funds.

(Full disclosure, I run a startup that's based on helping people do index investing, so I might be biased ;p)