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.
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.
You should point this out to http://wealthmagazine.com. They have a service they sell, where they train you on how individuals can time the market. You take a course they offer then buy into their online tool and start timing the market like the big boys. The course is all about how to effectively use their tools.
I went to a seminar that had some big names, Terry Bradshaw, Colin Powell, Gulliani, Bill Cosby. It was very entertaining and basically free. In between the speakers they sold you really hard on various things. Wealth Magazine had what I feel was the most aggressive sell.
They did the standard look at this 69 year old women who has consistently beat the market. If she can do it so can you. Well if I put 20 million monkeys in a room there will be a few who consistently beat the market.
This is the basic pitch
Their tools will show you where the big boys are moving their money. Because they are constrained by certain covenants they cannot move their money fast enough, but you can. When you see the money start to move out of one asset into another jump on it. The tool will also tell you if a stock is under valued (I guess no one else has this data so it stays undervalued?)
They made a killing that day. As I am sure they do in all of these events.
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).
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.
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]