Stock "Price Targets" and Buy/Hold/Sell Ratings

Finance
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Because the evidence, which is confirmed by academic study says eventually every managed fund will underperform the S&P 500. Even those QA firms have gotten hammered on some funds, which eventually folded. The law of averages tells us that if a firm has 1000 managed funds, a few of them will stand out as being over-performers. They tend to advertise those and not mention all of their dogs. Read this abstract on the binomial distribution for a further explanation. Sports prognosticators and fund managers used this to their advantadge by sending out their “picks” (each differnt) to hundreds, if not thousands of people every week. The ones that failed, they crossed those names off their list. Eventually they were whittled down to a dozen or so suckers that were given the winning picks for weeks on end. They figured this guy knows what he’s talking about and then bought his picks or invested with him, when he had no real knowledge of what he was doing. He just snookered them by playing a very large field.

A better question is why you think BRKx will outperform the S&P 500? Just because it has in the past, doesn’t mean they will in the future. There is evidence to suggest that BRKx will be unable to meet their past performance. Not only due to Buffet’s advanced age, but because their sheer size means that they will have to find more bargain companies to get returns commiserate to the the NAV. Speaking of NAV, I’m not certain but I don’t think BRKx’s price is determined by the underlying securities, the way index funds are priced. I suppose they can’t be becuase some of those companies are privately held in its entirety by BRKx. But if one could price it, I’d be surprised if the cost of BRKx wasn’t higher than the value of its positions. Probably because people are paying for the legend of Buffet, and the fund is overvalued.

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I don’t. I have no reason to believe one will out-perform the other. What I’m surprised about is that you are certain one will out-perform the other even though the basis of your investment strategy is that no one knows what the market will do. There may be evidence that can prove that one will outperform the other, but you haven’t made that evidence clear.

You are using historical data when its beneficial to your argument (the S&P has historically out-performed all other managed funds); but rejecting it when its detrimental to your argument (“just because it has in the past, doesn’t mean [it] will in the future”). I agree with the latter, but if you assert that past performance is not relevant, you can’t use past performance to prove a different point.

Regarding the problems you mention with BRK.x - all of this may be true, and all of this may mean to a trained eye that the stock will collapse. But this is speculation. In my opinion, there’s nothing wrong with speculating; however, you are the one who posits that speculating and investing are mutually exclusive.

1 Like
83

Academics, who have published peer reviewed studies are the ones making the case that managed funds do not outperform low cost index funds. I choose to believe them, because they follow widely accepted methods. Your objections to my accepting this is simply obstreperous.

The burden of proof that BRKx outperform the S&P 500 going forward falls on those making that claim, because they provide no basis other than feelings which is in stark contrast to those that who have used the scientific method.

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[quote=“fasttimes, post:83, topic:1725, full:true”]
Academics, who have published peer reviewed studies are the ones making the case that managed funds do not outperform low cost index funds. I choose to believe them, because they follow widely accepted methods. Your objections to my accepting this is simply obstreperous.[/quote]
The studies I’ve seen show that the managed funds on average have not historically outperformed index funds. They don’t say anything about the future unless you choose to believe that past performance predicts future results.

The burden of proof that BRKx outperform the S&P 500 going forward falls on those making that claim, because they provide no basis other than feelings which is in stark contrast to those that who have used the scientific method.

But using the same argument, BRK has historically outperformed the market over a similarly long period - there’s no question, the proof is in the prices. There’s no scientific method here - nobody knows what the future will bring, all you can do is look at the past and try to understand the principles involved.

If you believe the first argument that managed funds will underperform in the future based on past performance, why wouldn’t you believe the second that index funds will underperform BRK based on past performance? Berkshire history is a decade longer than index funds have even existed, and they outperformed by much larger margin than index beat managed, so based on the statistics alone you should have a lot more confidence in this claim than the former.

It sounds like you’re arguing from either feelings / belief / faith or first principles, and if so, you should state them because the past is clear and doesn’t support the claim about Berkshire. Now I’m not sure BRK will outperform going forward, and there are various good reasons to be cautious (Buffett’s age, size of assets managed, more competive markets), but those are arguments from first principles.

It’s the difference between arguing managed funds have underperformed so they will, in contrast to saying they charge more than their typical pre-fee excess return over the market, so on average they should be expected to underperform. And, incidentally, the principle about expenses is one that’s actually useful - I seem to remember that the lowest cost actively managed funds have done fairly well for themselves on a relative basis. If you go over to Bogleheads and try to argue that no one should own Vanguard’s Wellington funds because they’re active, you’ll get an earful from “index” investors happy with their excellent past performance.

1 Like
85

However that’s not how statistical modeling works for predicting future events. Even if one were to assume Buffet and Munger will live forever, and absent some magic that can’t be explained by the effficient markets theory, then a Monte Carlo simulation should show that BRKx is due for a regresssion. And that’s rather the point, no? Yet despite every fund displaying the “past performance does not predict future earnings” waning, they then go ahead and encourage the investor to do exactly that.

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Warren Buffet wins bet about index funds outperforming hedge funds.