market vs. limit orders

[Beliavsky]

http://www.chicagogsb.edu/capideas/oct07/4.aspx
The Limit Order Effect:
Understanding the Behavior of Uninformed Investors
Research by
Juhani Linnainmaa
University of Chicago

My conclusion from the article is that investors should use limit
orders to buy or sell a stock only if they are willing and able to
following news in the stock for the time that the limit order is open,
in order to avoid getting "picked off" by better-informed traders.

[Elizabeth Richardson]

"Beliavsky" > wrote in message

> The Limit Order Effect:
> Understanding the Behavior of Uninformed Investors

I haven't read the article, nor will I, but it is my opinion that uninformed
investors shouldn't be investing in individual stock issues. Investors who
are unwilling to keep themselves informed about the individual companies in
which they have ownership are better advised to purchase mutual funds.

Elizabeth Richardson

[Beliavsky]

On Oct 16, 11:38 am, "Elizabeth Richardson"
> wrote:
> "Beliavsky" > wrote in message
> > The Limit Order Effect:
> > Understanding the Behavior of Uninformed Investors
>
> I haven't read the article, nor will I, but it is my opinion that uninformed
> investors shouldn't be investing in individual stock issues. Investors who
> are unwilling to keep themselves informed about the individual companies in
> which they have ownership are better advised to purchase mutual funds.

Because brokerage commissions are so low, even zero under some
arrangements, and because computing power and Web access have made it
easier to handle a portfolio with many positions, I think an affluent
investor with no stock-picking still could still outperform the
indices on an after-tax basis through tax-loss harvesting of a
diversified stock portfolio. There are also mechanical stock selection
strategies such as overweigting low P/E stocks that I think will work
over time. I'd probably be doing this myself if my employer did not
make stock trading cumbersome (I work for a money management firm).

[Elle]

"Beliavsky" > wrote
>> "Beliavsky" > wrote in message
>> > The Limit Order Effect:
>> > Understanding the Behavior of Uninformed Investors
> Because brokerage commissions are so low, even zero under
> some
> arrangements, and because computing power and Web access
> have made it
> easier to handle a portfolio with many positions, I think
> an affluent
> investor with no stock-picking still could still
> outperform the
> indices on an after-tax basis through tax-loss harvesting
> of a
> diversified stock portfolio.

What specifically do you mean by "tax-loss harvesting" here?
My first guess would be that you mean selling a stock that
has done poorly and taking the capital loss for the tax
year, then re-buying it some 30+ days later (precluding an
illegal wash transaction) and in the next tax year or
whatever re-purchasing it?

> There are also mechanical stock selection
> strategies such as overweigting low P/E stocks that I
> think will work
> over time.

"Work" here being a relative term, it seems to me. If one
stays fairly diversified for a long enough time (say 10
years or more); does not get into a habit of selling low,
buying high; and if history is any guideline; then with most
any "stock-picking strategy," one will do well.

> I'd probably be doing this myself if my employer did not
> make stock trading cumbersome (I work for a money
> management firm).

I am curious about your decision to put $100k into a hedge
fund in 2006 vs., perhaps instead, doing trading on your own
time with a discount broker, per your comments right above.

Aside: I can't find the original post that initiated this
thread. Anyone else have this problem?

[Elizabeth Richardson]

"Beliavsky" > wrote in message
ups.com...

> I think an affluent
> investor with no stock-picking still could still outperform the
> indices on an after-tax basis through tax-loss harvesting of a
> diversified stock portfolio. There are also mechanical stock selection
> strategies such as overweigting low P/E stocks that I think will work
> over time.

But doesn't this presume an Informed Investor as opposed to an Uninformed
Investor?

Elizabeth Richardson

[Beliavsky]

On Oct 16, 2:34 pm, "Elizabeth Richardson" >
wrote:
> "Beliavsky" > wrote in message
>
> ups.com...
>
> > I think an affluent
> > investor with no stock-picking still could still outperform the
> > indices on an after-tax basis through tax-loss harvesting of a
> > diversified stock portfolio. There are also mechanical stock selection
> > strategies such as overweigting low P/E stocks that I think will work
> > over time.
>
> But doesn't this presume an Informed Investor as opposed to an Uninformed
> Investor?

To implement the strategy, the investor needs to be aware of the low P/
E anomaly but not details about the indidividual stocks. Closely
following dozens of stocks is not feasible for most non-professional
investors, but running a stock screening program is not difficult.

[joetaxpayer]

Beliavsky wrote:
> To implement the strategy, the investor needs to be aware of the low P/
> E anomaly but not details about the indidividual stocks. Closely
> following dozens of stocks is not feasible for most non-professional
> investors, but running a stock screening program is not difficult.

A reading of Ken Fisher's "The Only Three Questions That Count" may
convince you that the P/E ratio of the market, or individual stocks, is
not a predictor of future returns. That scatter plots of P/E and return
show no correlation that one can use to make money looking forward. His
data, sourced from our friend Robert Shiller, shows an R^2 of .03 which,
if my stats classes taught me anything, is close to random.

Note - I haven't stated I am convinced either way, I offer the above
remark as 'recommended reading' (I need to add to my list) and the
suggestion that conventional wisdom isn't always true.
JOE (currently reading the new Greenspan book, in case you are wondering)

[kastnna]

On Oct 16, 3:09 pm, Beliavsky > wrote:

> To implement the strategy, the investor needs to be aware of the low P/
> E anomaly but not details about the indidividual stocks. Closely
> following dozens of stocks is not feasible for most non-professional
> investors, but running a stock screening program is not difficult.

The efficient market hypothesis (even in its weaker forms) suggest
that if the "everyday", "uninformed", or otherwise "average" investor
began widespreadly engaging in this method, the method would no longer
work. This can be evidenced by the decline of both the "small firm in
January effect" and "dogs of the dow" strategy.

In this case, I would think that if everyone were seeking out the
stocks that had low p/e ratios demand would drive up prices of those
stocks up and destroy the strategy. To make things even simpler, if it
is so easy to outperform the market/index, why do most people, in
fact, not?

[Ron Peterson]

On Oct 16, 11:18 pm, kastnna > wrote:

> In this case, I would think that if everyone were seeking out the
> stocks that had low p/e ratios demand would drive up prices of those
> stocks up and destroy the strategy. To make things even simpler, if it
> is so easy to outperform the market/index, why do most people, in
> fact, not?

I am a value investor preferring low p/e and low p/b stocks. I did
better than average over the past 3 years in 3 accounts (regular and
two IRAs). The problem is that most of the value stocks are in the
small cap category and the amount of stock in dollar terms is limited.

People aren't willing to invest in companies that they haven't heard
about, so small caps don't attract the capital even if they have some
good products.

--
Ron

[Ron Peterson]

On Oct 16, 10:38 am, "Elizabeth Richardson"
> wrote:

> I haven't read the article, nor will I, but it is my opinion that uninformed
> investors shouldn't be investing in individual stock issues. Investors who
> are unwilling to keep themselves informed about the individual companies in
> which they have ownership are better advised to purchase mutual funds.

There are many different kinds of mutual funds, doesn't it take
expertise to pick the right ones?

--
Ron

[kastnna]

On Oct 16, 3:09 pm, Beliavsky > wrote:

> To implement the strategy, the investor needs to be aware of the low P/
> E anomaly but not details about the indidividual stocks. Closely
> following dozens of stocks is not feasible for most non-professional
> investors, but running a stock screening program is not difficult.

On Oct 16, 3:09 pm, Beliavsky > wrote:

> To implement the strategy, the investor needs to be aware of the low P/
> E anomaly but not details about the indidividual stocks. Closely
> following dozens of stocks is not feasible for most non-professional
> investors, but running a stock screening program is not difficult.

The efficient market hypothesis (even in its weaker forms) suggest
that if the "everyday", "uninformed", or otherwise "average" investor
began widespreadly engaging in this method, the method would no longer
work. This can be evidenced by the decline of both the "small firm in
January effect" and "dogs of the dow" strategy.

In this case, I would think that if everyone were seeking out the
stocks that had low p/e ratios demand would drive up prices of those
stocks up and destroy the strategy. To make things even simpler, if it
is so easy to outperform the market/index, why do most people, in
fact, not?

[Ron Rosenfeld]

On Tue, 16 Oct 2007 12:35:43 -0500, "Elle"
> wrote:


>
>Aside: I can't find the original post that initiated this
>thread. Anyone else have this problem?

I, too, cannot find the original post. Although I did find the article
mentioned by doing a Google search.
--ron

[Beliavsky]

On Oct 17, 2:29 am, kastnna > wrote:

<snip>

> The efficient market hypothesis (even in its weaker forms) suggest
> that if the "everyday", "uninformed", or otherwise "average" investor
> began widespreadly engaging in this method, the method would no longer
> work. This can be evidenced by the decline of both the "small firm in
> January effect" and "dogs of the dow" strategy.

Reasonable people can disagree in their expectations of the strength
of the "value effect" going forward. It will fluctuate over time.
Early 2000, a time when many investors were infatuated with growth
stocks, was a good time to be a value investor.

> In this case, I would think that if everyone were seeking out the
> stocks that had low p/e ratios demand would drive up prices of those
> stocks up and destroy the strategy. To make things even simpler, if it
> is so easy to outperform the market/index, why do most people, in
> fact, not?

I think it's because many individual investors do not diversify
properly and do not follow a systematic strategy.

[kastnna]

On Oct 17, 12:13 am, Ron Pthose
> I am a value investor preferring low p/e and low p/b stocks. I did
> better than average over the past 3 years in 3 accounts (regular and
> two IRAs). The problem is that most of the value stocks are in the
> small cap category and the amount of stock in dollar terms is limited.

Congratulations. However, I was commenting on the OP's statement that
EVERYONE, even the uninformed, could regularly outperform the market.
A wealth of historical studies and the S&P Index versus Active (SPIVA)
report has repeatedly shown that active funds have not kept up with
their respective benchmarks. There are obviously funds that do
outperform, and I commend you for your ability to choose them. Data
suggest the Average Joe will not be so fortunate.

I agree that many investors prefer to go with the larger companies
that they know. Investor aprehension is probably one of the reasons
this strategy has historically worked. My point was that IF everyone
began investing this way, as the OP suggested, simple economics would
eliminate the "advantage". Everyone seeking out the limited number of
stocks that have low p/e would increase demand and drive up the price,
thus eliminating the ability to "get in cheap". A few investors that
were ahead of the curve would still make a tidy profit, but the masses
would not.

The real question should be that if everyone begins using your method
(i.e. stock screeners), what then are you going to do to not become
one of the unfortunate masses? I've read some novel insights on why
the informed investor NEEDS the uninformed investor to maintain his
market advantage (and profits). IOW, if everyone were exactly as smart
and informed as you, how would you then "get in cheap" on an
investment?

[Beliavsky]

On Oct 16, 1:35 pm, "Elle" > wrote:

<snip>

> What specifically do you mean by "tax-loss harvesting" here?

I did not invent the phrase, and Google produces some relevant links,
for example

http://www.fpanet.org/journal/articles/2003_Issues/jfp1103-art9.cfm
Is Tax-Loss Harvesting Worth It? Greater After-Tax Returns Through
Active Selection
by Robin B. Chance, CFA, Susan Hirshman, CPA, CFP®, CLU, CFA, and
Gordon B. Fowler, Jr.

> > I'd probably be doing this myself if my employer did not
> > make stock trading cumbersome (I work for a money
> > management firm).
>
> I am curious about your decision to put $100k into a hedge
> fund in 2006 vs., perhaps instead, doing trading on your own
> time with a discount broker, per your comments right above.

Here are the details behind "cumbersome". My firm prohibits employee
trading in stocks they have a position in. Systematic strategies such
as "buy stocks when they sell at a P/E in the bottom 20% of the
market" have a sell rule as well as a buy rule, and I cannot on being
able to sell when the strategy says to do so. Many financial firms
have such restrictions but do allow trading in ETFs, which could also
be used for tax loss harvesting.

[Beliavsky]

On Oct 17, 10:12 am, kastnna > wrote:
> On Oct 17, 12:13 am, Ron Pthose
>
> > I am a value investor preferring low p/e and low p/b stocks. I did
> > better than average over the past 3 years in 3 accounts (regular and
> > two IRAs). The problem is that most of the value stocks are in the
> > small cap category and the amount of stock in dollar terms is limited.
>
> Congratulations. However, I was commenting on the OP's statement that
> EVERYONE, even the uninformed, could regularly outperform the market.
> A wealth of historical studies and the S&P Index versus Active (SPIVA)
> report has repeatedly shown that active funds have not kept up with
> their respective benchmarks. There are obviously funds that do
> outperform, and I commend you for your ability to choose them. Data
> suggest the Average Joe will not be so fortunate.

The vast majority of equity mutual funds are not run in the formulaic
manner I was advocating, so this data is of questionable relevance.
Also, an individual investor would not be paying management fees (but
could be paying for screening software and data).

[Elizabeth Richardson]

"Ron Peterson" > wrote in message
ups.com...
>
> There are many different kinds of mutual funds, doesn't it take
> expertise to pick the right ones?
>

By the right ones, do you mean those that are high earners? I think it takes
less expertise to pick a half dozen or so mutual funds and be successful,
than it does to pick 20 or so individual issues and be successful. Also with
mutual funds, the less one is willing to be involved with tracking progress,
there are now a number of "buy it and forget it" types. You may hold your
nose at these, but the OP was speaking of uninformed investors. I think even
uninformed investors owe it to themselves to save and invest for retirement.

Elizabeth Richardson

[Elle]

"Ron Peterson" > wrote
> I am a value investor preferring low p/e and low p/b
> stocks. I did
> better than average over the past 3 years in 3 accounts
> (regular and
> two IRAs). The problem is that most of the value stocks
> are in the
> small cap category and the amount of stock in dollar terms
> is limited.

"Value stock" has a fairly malleable meaning, and so a lot
of gray area exists. I would not generalize that most "value
stocks" are in the small cap category without qualifying
further.

> People aren't willing to invest in companies that they
> haven't heard
> about, so small caps don't attract the capital even if
> they have some
> good products.

I think they do attract the capital. Some of the evidence
lies in the fact that micro-small cap companies often grow
quickly to mid cap or larger companies. It's one reason why
micro-small cap stock mutual funds tend to have difficulties
staying micro-small.

[Elle]

"kastnna" > wrote
> I agree that many investors prefer to go with the larger
> companies
> that they know. Investor aprehension is probably one of
> the reasons
> this strategy has historically worked.

A small cap strategy, when applied long enough, has done
even better, historically.

I think what is more accurate is the observation that any
long term strategy of buying a fairly diverse basket of
stocks will work. Proposition: We need to get away from
trying to plug strategies other than holding diversely and
for the long term.

> I've read some novel insights on why
> the informed investor NEEDS the uninformed investor to
> maintain his
> market advantage (and profits). IOW, if everyone were
> exactly as smart
> and informed as you, how would you then "get in cheap" on
> an
> investment?

I increasingly think my investing success has indeed been
due to there being a lot of fools investing; buying baloney
products (I own Phillip Morris); selling low and buying
high; etc.

IIRC sage Ben Graham touches on how his "value stock"
strategy depends on panics, which of course are fueled
largely by the naive.

[Elle]

"Beliavsky" > wrote > On Oct 16, 1:35 pm,
"Elle" > wrote:
>> What specifically do you mean by "tax-loss harvesting"
>> here?
>
> I did not invent the phrase, and Google produces some
> relevant links,
> for example
>
> http://www.fpanet.org/journal/articles/2003_Issues/jfp1103-art9.cfm

What I wrote before is the gist of this article, of course.
I see the article concludes, inter alia: "Robert Jeffrey's
article argues that tax-efficient investing is easier said
than done. While we agree it is difficult, we think we have
shown that it is possible. As summarized in Table 2, by
taking tax losses, we were able to improve on a pure
indexing approach in a taxable portfolio. Harvested losses
provide an interest-free loan that can be used to generate
investment returns."

The paper denotes fun mathematics; a raison d'etre for
financial "academics"; and certainly the main point is
useful for some investors. E.g. I have sold at a loss to
reduce the net gain on my taxes, and then re-bought a month
later, because the company was still sound and I thought an
unfounded panic was behind the decline. Given my current tax
rate, though, it does not pay very well. Others mileage may
vary.

You wrote you "think an affluent investor with no
stock-picking s[k]ill could still outperform the indices on
an after-tax basis through tax-loss harvesting of a
diversified stock portfolio." This is so carefully qualified
as to make it not useful, IMO. Sure an investor (affluent
etc. or whatever) "could" outperform the indices; the normal
curve says some always will.

> Here are the details behind "cumbersome". My firm
> prohibits employee
> trading in stocks they have a position in. Systematic
> strategies such
> as "buy stocks when they sell at a P/E in the bottom 20%
> of the
> market" have a sell rule as well as a buy rule, and I
> cannot on being
> able to sell when the strategy says to do so. Many
> financial firms
> have such restrictions but do allow trading in ETFs, which
> could also
> be used for tax loss harvesting.

Please realize you do not have to answer this, but I am
curious: Where do you think your investment in the hedge
firm is headed? How long will you hold this investment?
(Very decent of you to post that it so far has not gone well
at all, btw, so if you wish to say nothing further,
understood, of course. It's only Usenet.)

[Tad Borek]

Beliavsky wrote:
> http://www.chicagogsb.edu/capideas/oct07/4.aspx
> The Limit Order Effect:
>
> My conclusion from the article is that investors should use limit
> orders to buy or sell a stock only if they are willing and able to
> following news in the stock for the time that the limit order is open,
> in order to avoid getting "picked off" by better-informed traders.


B-
That's exactly the reason I don't use GTC (good till canceled) limit
orders, they add that risk. It's a catch-22 to set a buy price
substantially below the market...it won't execute just on intra-day
volatility so it just hangs out there. If the price falls, it's often
driven by news, i.e. a change in circumstances...which may justify a
re-evaluation and a lower price. Same effect occurs on the upside.

We don't need any esoteric analysis to come up with obvious examples of
informed/uninformed investors. Recently a stock was trading for about
$69, with a buyout anticipated at $75 or higher. Instead a final cash
merger was announced at $65, so the stock quickly dropped below that
price. If there was a guy with a buy limit order somewhere in that
in-between range, and he was mowing the lawn when the deal was
announced, he was "uninformed" and his unattended limit order went through.

Given their high ownership of "headline risk" kinds of stocks perhaps,
as the study suggests, this limit-order effect explains a piece of the
subpar returns that always show up in analyses of individual-investor
stock trading. I'm skeptical of scale though...I wonder how the study
was able to isolate this effect without analyzing millions of orders -
knowing order placement date & execution date, and looking at news
events around trade dates.

-Tad

[Elle]

"Tad Borek" > wrote
> We don't need any esoteric analysis to come up with
> obvious examples of
> informed/uninformed investors. Recently a stock was
> trading for about
> $69, with a buyout anticipated at $75 or higher. Instead a
> final cash
> merger was announced at $65, so the stock quickly dropped
> below that
> price. If there was a guy with a buy limit order somewhere
> in that
> in-between range, and he was mowing the lawn when the deal
> was
> announced, he was "uninformed" and his unattended limit
> order went through.

So he was wrong to set a limit order at a price somewhere
between $65 and $69?

In the long run, he'll be fine, and even a little better off
than the guy/gal who bought at $69.

I set good-til-cancelled orders frequently (though in the
last year or so, on less than three stocks on any given
day). A minor, mass panic occurs sometime (one that is
related to the stock market as a whole and so mass hysteria
as opposed to the particular company), and I grab up a deal.
Of course if the price falls further, I "coulda" had a
better deal. So why do I do this? Because the better deal
requires 20/20 hindsight and so is a figment of one's
imagination. No one can say with any statistical confidence
how much further a stock will fall when there is a panic. As
a stock is falling in price, only numerology will forecast
the actual, exact, /best/ price at which to buy. As a
well-read person knows, this sort of forecasting depends on
the alignment of the stars (that is, luck).

The point is to pick up a stock at what one thinks is a
reasonable enough price. Fortunately, time has proven that
not getting enmeshed in woulda-coulda-shoulda ("Gee, I could
have been wealthy if I only bought xyz... ") and just being
patient pays.

[BreadWithSpam@fractious.net]

"Elizabeth Richardson" > writes:
> "Ron Peterson" > wrote in message
> ups.com...

> > There are many different kinds of mutual funds, doesn't it take
> > expertise to pick the right ones?

> By the right ones, do you mean those that are high earners? I think it takes
> less expertise to pick a half dozen or so mutual funds and be successful,
> than it does to pick 20 or so individual issues and be successful. Also with

Especially if one narrows the field to one or two companies
and just follows a simple asset allocation and uses a couple
of low-cost index funds. The universe of thousands of
funds collapses to, say, 20 or so. (ie. vanguard or
the fidelity index funds).

> mutual funds, the less one is willing to be involved with tracking progress,
> there are now a number of "buy it and forget it" types. You may hold your
> nose at these, but the OP was speaking of uninformed investors. I think even
> uninformed investors owe it to themselves to save and invest for retirement.

And many of them would do way better to simply choose one
of those target retirement or simple balanced funds and
set it and forget it than they'll ever do chasing performance,
juggling asset classes, etc etc.

It doesn't have to be difficult. There's a huge business
to be made *convincing* folks that it has to be, though.

A relative novice can put together a very simple portfolio
with a very small handful of funds (perhaps with a little
bit of help) and manage/rebalance it yearly fairly trivially.
I do *not* believe the same can be said of doing so with
individual stocks.

Even the most simple portfolio of individual stocks - say
20 or so pulled up mechanically by a screen - will require
orders of magnitude more management than a simple index
fund asset-allocation portfolio. I'd be very surprised
if things like tax-loss harvesting can be profitable enough
to justify this for a relatively passive investor unless
that investor has a very high income, a lot of wealth, and
most of it in taxable accounts. And in that case, chances
are he or she has more profitable things to do with his or
her time, too, except for a very few very very wealthy.

--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

[Douglas Johnson[_2_]]

"Elle" > wrote:

>
>"Tad Borek" > wrote
>> Recently a stock was
>> trading for about
>> $69, with a buyout anticipated at $75 or higher. Instead a
>> final cash
>> merger was announced at $65, so the stock quickly dropped
>> below that
>> price. If there was a guy with a buy limit order somewhere
>> in that
>> in-between range, and he was mowing the lawn when the deal
>> was
>> announced, he was "uninformed" and his unattended limit
>> order went through.
>
>So he was wrong to set a limit order at a price somewhere
>between $65 and $69?
>
>In the long run, he'll be fine, and even a little better off
>than the guy/gal who bought at $69.

Because it was a cash buy out offer, the long run does him no good. He was
basically buying $65 cash for between $65 and $69 dollars. Not a road to
riches.

-- Doug

[Tad Borek]

Elle wrote:
> "Tad Borek" > wrote
>>We don't need any esoteric analysis to come up with
>>obvious examples of
>>informed/uninformed investors.

> So he was wrong to set a limit order at a price somewhere
> between $65 and $69?


Elle, he was wrong to place a GTC without monitoring the company for
news, because it turned him into an "uninformed" trader and resulted in
a trade with a guaranteed loss. That's a contention of the study
Beliavsky posted, that limit orders placed by individual investors get
executed, despite news that would make a rational order-placer adjust
their limit price. And the reason is simply that they're not watching
the company while the GTC sits out there.

Most instances of "uninformed" investors, whose limit orders reflect
stale information, will be much more subtle and leave room for
interpretation of how much it affects the fair price. The cash merger is
an easy example because the "guaranteed loss" is clear-cut. No rational
investor will place a trade that leads to a guaranteed loss, and if the
merger is $65/shr anything above that is such a trade.

If this effect happens a lot, and especially among individual investors,
perhaps the contention of the study is correct -- that it's a
contributing factor to the sub-par returns observed among individual
investors who pick individal stocks (these studies have been discussed
many times on MIFP).

If I read your post correctly, you may not be monitoring company news
while you have a GTC limit order open, which reinforces their point. If
so, it has a simple solution -- as Beliavsky said -- just keep an eye on
the news while a GTC sits out there, and be ready to cancel or adjust it
if something big happens (like a cash merger at $10 below your limit price).

-Tad

[Elle]

"Douglas Johnson" > wrote
> Because it was a cash buy out offer, the long run does him
> no good. He was
> basically buying $65 cash for between $65 and $69 dollars.
> Not a road to
> riches.

He was buying stock, not cash. Do you understand the
difference for the long run? Are you aware that stocks have
historically averaged an increase of about 10% a year?
Historically speaking, if the guy invests enough in stocks,
diversifies and holds for the long run, he's going to do
well regardless of whether he buys at $65 or $69.

[Elle]

"Tad Borek" > wrote
> he was wrong to place a GTC
[good til cancelled]
> without monitoring the company for news, because it turned
> him into an "uninformed" trader and resulted > in a trade
> with a guaranteed loss.

Do you measure an investor's performance by short-term,
paper losses/gains? By this standard, many day traders are
geniuses.

One cannot say the loss was guaranteed without exercising
20/20 hindsight. Or, in the alternative, you'd have to dress
down the guy who was /watching/ the price and, necessarily
arbitrarily, had chosen to buy at what he /guessed/ was the
bottom of say $65 when in fact the stock fell to $64.6
before day's end. Oh the fool for buying at $65! (not)

> That's a contention of the study Beliavsky posted, that
> limit orders placed by individual investors get executed,
> despite news that would make a rational order-placer
> adjust their limit price.

The alleged "rational" order placer may just as easily guess
the wrong price and either buy "too high" (by the 20/20
hindsight, short term, standards you propose) or not buy at
all, because he set the price too low.

> just keep an eye on the news while a GTC sits out there,
> and be ready to cancel or adjust it if something big
> happens (like a cash merger at $10 below your limit
> price).

This is some of the stuff of some market timers. By
contrast, I am interested in fundamentals and estimate a
fair price based on them. When this price is reached, I buy.
If the price goes somewhat lower, it's generally noise for
the day, and I remember that generally I buy for the long
run.

That paper promotes numerology and day trading, IMO.

[Elle]

"Elle" > wrote
> "Douglas Johnson" > wrote
>> Because it was a cash buy out offer, the long run does
>> him no good. He was
>> basically buying $65 cash for between $65 and $69
>> dollars. Not a road to
>> riches.
>
> He was buying stock, not cash.

Oops. Tad gave an example that is far from typical of
stocks; an instance where stockholders are about to be paid
cash by a company and have no say in it.

I was speaking of the more general situations to which
Beliavsky's paper refers. My remarks in the previous post
apply to them. There are nearly always exceptions, but we
are speaking of trends and general guidelines. In fact, the
author of the paper B cites does not condemn per se the use
of limit orders; he urges caution. The same caution should
be provided for market orders, since at any point in time
there is no telling what news is just around the corner to
radically alter a company's valuation and/or stock price.

[kastnna]

On Oct 17, 10:49 am, Beliavsky > wrote:
> The vast majority of equity mutual funds are not run in the formulaic
> manner I was advocating, so this data is of questionable relevance.
> Also, an individual investor would not be paying management fees (but
> could be paying for screening software and data).

Forgive my ignorance, but I didn't follow this statement. I wasn't
implying that all of the equity funds out there would fall under the
scope of your stock screener. I was simply saying that, on average,
historical data suggest the active investing has provided inferior
returns to passive management. I was not questioning your method. It
may work, but most methods do not.

Even if we assume your method unequivocably outperforms that still
doesn't address the "everybody can make money this way" statement. The
very essence of the efficient market theory is that if your method
works, and everybody finds out, then everyone will begin using your
method. As a result the knowledge of your method will become
incorporated into stock pricing and eventually your method will no
longer work. Its pure economics of demand pricing and free markets.
Its the same reason that an infinite number of companies can't enter
into a given industry and perpetually maintain the profit that the
very first industry achieved (ceteris paribus, of course). Eventually
competition, cost of inputs, etc, etc eliminate (or at least reduce)
the advantage that the original companies had.

I also don't understand your argument regarding fees. Passive
management can easily be done without large paying management fees. On
the contrary some great index funds can be bought and held for only a
few basis points. And as you said, that can be done without paying for
screener software, analytical data, and brokerage fees. Surely you
don't intend to argue that active management is more "fee friendly"
than passive management?

[Tad Borek]

Elle wrote:
>>just keep an eye on the news while a GTC sits out there,
>>and be ready to cancel or adjust it if something big
>>happens (like a cash merger at $10 below your limit
>>price).
>
> This is some of the stuff of some market timers. By
> contrast, I am interested in fundamentals and estimate a
> fair price based on them. When this price is reached, I buy.
> If the price goes somewhat lower, it's generally noise for
> the day, and I remember that generally I buy for the long
> run.
>
> That paper promotes numerology and day trading, IMO.


Elle, you crack me up - sometimes I think you're intentionally egging us
all on. The paper has about as much to do with numerology and day
trading as it does with making a lemon chiffon pie.

If you don't see why you'd want to re-assess your limit order if a cash
merger was announced at $10 below your limit price, I suggest you find
out! It has nothing to do with day trading or market timing, it's a
definitive change in the "fair price" based on some very obvious
"fundamentals" (which change, as news happens...news like "this stock is
never going to be worth more than $65 because that's the merger price").

-Tad

[Beliavsky]

On Oct 16, 8:14 pm, joetaxpayer > wrote:
> Beliavsky wrote:
> > To implement the strategy, the investor needs to be aware of the low P/
> > E anomaly but not details about the indidividual stocks. Closely
> > following dozens of stocks is not feasible for most non-professional
> > investors, but running a stock screening program is not difficult.
>
> A reading of Ken Fisher's "The Only Three Questions That Count" may
> convince you that the P/E ratio of the market, or individual stocks, is
> not a predictor of future returns.

I read the book and have a low opinion of it. After making a big to-do
about how P/E ratios alone do not predict stock market returns, Fisher
eventually acknowledges that in conjunction with interest rates, they
have shown some predictive power. One can search "fed model" at SSRN
http://papers.ssrn.com/sol3/DisplayAbstractSearch.cfm to find
research.

> That scatter plots of P/E and return
> show no correlation that one can use to make money looking forward.

There have been many academic studies showing low P/E stocks
outperform on average.

[Douglas Johnson[_2_]]

"Elle" > wrote:

>"Douglas Johnson" > wrote
>> Because it was a cash buy out offer, the long run does him
>> no good. He was
>> basically buying $65 cash for between $65 and $69 dollars.
>> Not a road to
>> riches.
>
>He was buying stock, not cash. Do you understand the
>difference for the long run? Are you aware that stocks have
>historically averaged an increase of about 10% a year?
>Historically speaking, if the guy invests enough in stocks,
>diversifies and holds for the long run, he's going to do
>well regardless of whether he buys at $65 or $69.

Come on, you've been reading my postings long enough to know that I know all
that. Please reread Tad's original post, or even the part I quoted.

The limit order was triggered when a cash buy out was made at $65 for a stock
that had been selling for over $69, thus the price fell and triggered his limit
order. Yes, he was buying stock, but it was about to be converted into cash at
less than his purchase price. Still not a road to riches.

-- Doug

[kastnna]

On Oct 17, 11:18 am, "Elle" >
wrote:
> "kastnna" > wrote
>
> > I agree that many investors prefer to go with the larger
> > companies
> > that they know. Investor aprehension is probably one of
> > the reasons
> > this strategy has historically worked.
>
> A small cap strategy, when applied long enough, has done
> even better, historically.

That's exactly what I thougth I said (by "this strategy" I meant
investing in small caps like the OP indicated). Small caps are
historically undervalued at least in part because investors are
aprehensive about investing in firms they are unfamiliar with (as
opposed to blue chips).

> I think what is more accurate is the observation that any
> long term strategy of buying a fairly diverse basket of
> stocks will work. Proposition: We need to get away from
> trying to plug strategies other than holding diversely and
> for the long term.

I'm not plugging a strategy. I don't actively invest or use a
"method". I firmly believe in asset allocation and buying/holding. In
the post above I was saying that I believe active strategies may work,
but not on a large scale and not once they become widely used (as per
the efficient market theory).

> > I've read some novel insights on why
> > the informed investor NEEDS the uninformed investor to
> > maintain his
> > market advantage (and profits). IOW, if everyone were
> > exactly as smart
> > and informed as you, how would you then "get in cheap" on
> > an
> > investment?
>
> I increasingly think my investing success has indeed been
> due to there being a lot of fools investing; buying baloney
> products (I own Phillip Morris); selling low and buying
> high; etc.

Yep. It can be both entertaining and frustrating to see the market
grossly over-react to to new information.

> IIRC sage Ben Graham touches on how his "value stock"
> strategy depends on panics, which of course are fueled
> largely by the naive.

Thanks for the reference. I will be sure and take a look at that.

[Elle]

"Tad Borek" > wrote
> The paper has about as much to do with numerology and day
> trading as it does with making a lemon chiffon pie.

Sorry you don't get it. The paper obviously completely
ignores the conventional wisdom of investing in stocks only
for the long term. It's very much about short-term trading.
More grist for the academic mill, with its only practical
salient point being (for all buyers, limit or market): Keep
an eye on the companies you plan to buy/sell.

I explained my misreading of your example earlier. The
misreading is easy because your example is so extreme.
Preliminary announcements and chatter about possible buyouts
are the rule. The sudden price adjustment you propose is
unlikely, unless its related to a panic of sorts (which are
common). Or only someone completely oblivious would fall
into the trap you propose.

Fact is anyone buying or selling stocks should be informed,
and the same caution should be applied whether they use a
limit order or a market order. You may not like GTC orders,
but they are absolutely no big deal for long-term investors
who exercise reasonable caution. Arguably they represent the
advantage individual investors may have over mutual funds,
since the fund managers are not necessarily shopping for a
good price on a stock.

[Will Trice]

Elle wrote:
> "Beliavsky" > wrote

>>There are also mechanical stock selection
>>strategies such as overweigting low P/E stocks that I
>>think will work
>>over time.
>
>
> "Work" here being a relative term, it seems to me. If one
> stays fairly diversified for a long enough time (say 10
> years or more); does not get into a habit of selling low,
> buying high; and if history is any guideline; then with most
> any "stock-picking strategy," one will do well.

I think by "work" B meant beat the indices. In which case, many
stock-picking strategies do not "work" - witness actively managed mutual
fund performance vs. indices.

-Will

[Will Trice]

kastnna wrote:

> I'm not plugging a strategy. I don't actively invest or use a
> "method". I firmly believe in asset allocation and buying/holding.

Isn't asset allocation an active investment strategy?

-Will

[kastnna]

On Oct 17, 7:53 pm, Will Trice > wrote:

> Isn't asset allocation an active investment strategy?

I guess we could argue definitions and technicalities but I think the
short answer is no. At least not in the sense to which I was
referring. I buy once and rebalance annually, that's it. According to
investopedia, this is a "buy and hold strategy" which is often
associated with passive investment. Investopedia acknowledges there
are asset allocation methods (like Tactical AA and Dynamic AA) that
more resemble active investing however I do not recall anyone on MIFP
ever referring to those methods when discussing "asset allocation",
nor was I just now.

http://www.investopedia.com/articles/04/031704.asp

Will, your question implies that if you ever buy and or sell a stock
other than the original stock purchased you are engaging in active
management. Is this really your perspective or have I over-read your
statement?

[Will Trice]

kastnna wrote:

> Will, your question implies that if you ever buy and or sell a stock
> other than the original stock purchased you are engaging in active
> management. Is this really your perspective or have I over-read your
> statement?

Yes and no. It seems to me that active investing depends on making more
than trivial decisions on when to buy and sell. Passive investing
implies using an index fund (I realize that these are not conventioanl
definitions of these terms). So the arbitrary decision to buy two index
funds and allocate say 80% of investment funds to an S&P 500 index (for
example) and 20% to a total bond index (for example) requires an active
decision. So what? This is probably a trivial decision, so still
should be considered as non-active investing.

However, as I recall from your previous posts, you use a risk-based
approach to asset allocation. Meaning that you are using a
non-arbitrary method of determining your allocation, attempting to get
close to the efficient frontier by using asset volatilities and expected
returns. Presumably this allocation will shift over time as new data
comes in and will be affected by what I would consider to be non-trivial
decisions about your model. Even if implemented with indices, it seems
that this strategy is at least as active as say a strategy that
overweights the lowest P/E stocks in an index and then reallocates once
a year.

I apologize if I have misrepresented how you allocate, but the above
makes a good example for discussion nonetheless. Perhaps allocation as
described above should be considered "mechanical" as opposed to
"passive." If true, I would then posit that any mechanical system that
does not involve frequent trading is passive. Active strategies would
then be those strategies that are not mechanical (or, thus, passive).
The strategy presented by the OP would then be essentially passive (for
purposes of discussion).

Maybe.

-Will

[kastnna]

On Oct 18, 10:56 am, Will Trice > wrote:
>
> I apologize if I have misrepresented how you allocate, but the above
> makes a good example for discussion nonetheless. Perhaps allocation as
> described above should be considered "mechanical" as opposed to
> "passive." If true, I would then posit that any mechanical system that
> does not involve frequent trading is passive. Active strategies would
> then be those strategies that are not mechanical (or, thus, passive).
> The strategy presented by the OP would then be essentially passive (for
> purposes of discussion).
> -Will

No need to apologize. I think you are correct in your assessment of
how we/I invest. We use about a dozen ETFs that encompass something
like 99% of the market thus closely representing an efficient
frontier. Based on the investors risk tolerance we then move them
along the efficient frontier to determine the percent composition that
each ETF will have in the portfolio. We then rebalance back to those
%s annually. You are absolutely right that if one's risk tolerance
changed we would change the composition %s of the portfolio.
Realistically, we only make minor adjustments every 3-5 years. Of
course, if a major (usually unexpected) life event occurs, an investor
may find that his/her risk tolerance has radically changed over-night.
In that event we would likely change someones asset allocation even if
we had rebalanced the day before. The ETFs do not change, but there %
composition certainly could/does.

Maybe that is active trading by some definitions. I have never really
considered it thus because the investment changes are not made based
on the fundamentals of the investment or current market trends, but
rather the needs of the client. I think your use of "mechanical" is
pretty good way of looking at it. Under that rationale I also think
its possible that the OPs method could be mechanical/passive, but its
pushing the limits (there is alot more lilkelyhood of trading in and
out of positions to exploit pricing phenomenons). I don't personally
have a problem with the OPs methods. The thesis of my early posts is
that based on EMT and demand-pricing economics, ceteris paribus, ANY
method that attempts to take advantage of investments based on their
over or under valued status MAY work, but if they become widely know,
understood, and/or engaged-in their success margin will decline,
possibly to negative numbers. Think about how much more success an
investor would have if he were the only person in the world that knew
about the low p/e phenomenon. Less people competing for those stocks
means lower purchase prices. That's why I contend that every investor
out there, even the uninformed, could not realistically make money
this way.

[joetaxpayer]

kastnna wrote:

> http://www.investopedia.com/articles/04/031704.asp

The page links further to a definition of Active management, which
offers "The opposite of active management is called passive management,
better known as indexing."

Now this would strike me as suggesting that any definable, rules based
system which at any point can define the stocks to be purchased, can be
forged into an index fund, and would be considered passive. And asset
allocation, which is rules based, to adjust back to a given percent mix
either based on the time or deviation from the initial target, would be
no different.

Am I off base here?
JOE

[TB]

Will Trice wrote:
> Isn't asset allocation an active investment strategy?


In the institutional-investor world there's a distinction between
"tactical" and "strategic" asset allocation.

Tactical AA is an active strategy, where the investor makes frequent
shifts among the asset classes based on subjective assessments of their
relative value. One could nitpick about what constitutes "frequent" so
use the obscenity definition, "you know it when you see it."

Strategic AA is what most people think of as "asset allocation"...coming
up with the pie chart, filling in each slice with some type of
investment that serves as a proxy for the asset class, and changing the
mix only to rebalance the mix back to the target percentages, or when
circumstances change.

A strategic asset allocator has to make some subjective decisions that
involve assessments of the asset classes, and even the choice of asset
classes isn't driven entirely by the Invisible Hand (example: are REITs
a separate asset class or do you just own them as part of a broader
index like the Russell 2000?) But that doesn't make them "active" --
unless you just want to do away with the concept of passive strategies.

At the investment level, the active/passive distinction hinges on
whether selection criteria involve security analysis or something rote.
"Stocks whose names begin with the letter G" is a passive investment
strategy, so is "largest 1000 US stocks, by market cap." Something lost
in translation is that a passive investor wants to use criteria that
have meaning. If someone created the "letter-G index", that wouldn't
make it an asset class, and some of the ETFs coming out these days are
based on "indices" that make about as much sense.

-Tad

[Ron Rosenfeld]

On Thu, 18 Oct 2007 20:42:34 -0500, TB > wrote:

>At the investment level, the active/passive distinction hinges on
>whether selection criteria involve security analysis or something rote.

How would you classify investing using a defined strategy with yearly
re-balancing; such as the various strategies discussied by O'Shaughnessey
in What Works on Wall Street?
--ron

[Beliavsky]

On Oct 18, 4:30 pm, kastnna > wrote:
> On Oct 18, 10:56 am, Will Trice > wrote:
>
>
>
> > I apologize if I have misrepresented how you allocate, but the above
> > makes a good example for discussion nonetheless. Perhaps allocation as
> > described above should be considered "mechanical" as opposed to
> > "passive." If true, I would then posit that any mechanical system that
> > does not involve frequent trading is passive. Active strategies would
> > then be those strategies that are not mechanical (or, thus, passive).
> > The strategy presented by the OP would then be essentially passive (for
> > purposes of discussion).
> > -Will

Both of you have equated "passive" with "mechanical". I don't agree. A
strategy that bought at the close each day stocks that had fallen from
the previous close would be mechanical, but since it would have
turnover exceeding 100, it would not be passive. The strategy I
mentioned of buying low P/E stocks and holding them as long as they
remain low P/E is somewhat active, because stocks would be sold when
their P/E's rose too high.

<snip>

> The thesis of my early posts is
> that based on EMT and demand-pricing economics, ceteris paribus, ANY
> method that attempts to take advantage of investments based on their
> over or under valued status MAY work, but if they become widely know,
> understood, and/or engaged-in their success margin will decline,
> possibly to negative numbers. Think about how much more success an
> investor would have if he were the only person in the world that knew
> about the low p/e phenomenon. Less people competing for those stocks
> means lower purchase prices. That's why I contend that every investor
> out there, even the uninformed, could not realistically make money
> this way.

Yes, but that does not mean that the next reader of MIFP that tries to
do so will fail. My point is that the "barrier to entry" of a
systematic strategy -- one that can be computerized -- is lower for
many individuals than the traditional qualitative approach requiring
in-depth knowledge of the fundamentals of hundreds of companies.

Your approach of periodic rebalancing of asset classes is reasonable,
but it could *not* be followed by all investors. Suppose that the
dollar-weighted optimal allocation of all investors is 60/40 stocks/
bonds, but that ratio of market caps of stocks to bonds is not 60/40.
Clearly not everyone can have the optimal allocation. Looking at the
problem dynamically, suppose that in a bear market the market cap of
stocks falls by 40% while the market cap of bonds rises. Your
rebalancing approach would tell people to sell bonds and buy stocks,
but if everyone rebalanced, who would be there to buy bonds and sell
stocks?

Neither your method nor the low P/E strategy can be profitably
employed by every investor, but that does not mean that either
approach is wrong for the *marginal* investor.

[kastnna]

On Oct 18, 7:53 pm, joetaxpayer > wrote:
> The page links further to a definition of Active management, which
> offers "The opposite of active management is called passive management,
> better known as indexing."
>
> Now this would strike me as suggesting that any definable, rules based
> system which at any point can define the stocks to be purchased, can be
> forged into an index fund, and would be considered passive. And asset
> allocation, which is rules based, to adjust back to a given percent mix
> either based on the time or deviation from the initial target, would be
> no different.
>
> Am I off base here?
> JOE

I don't really know what I think yet (I thought I did, but now I am re-
evaluating my position). Like I said, I have always thought of using
index funds to create an asset allocation as being passive. I think
perhaps Tad did a better job of explaining my stance than I have so
far. Its not necesarily the investments or the frequency of investment
(within reason) but the reason for investing that differentiate active
from passive.

[Will Trice]

TB wrote:
> Will Trice wrote:

> At the investment level, the active/passive distinction hinges on
> whether selection criteria involve security analysis or something rote.
> "Stocks whose names begin with the letter G" is a passive investment
> strategy, so is "largest 1000 US stocks, by market cap."

I think this is what I said when I wrote, "I would then posit that any
mechanical system that does not involve frequent trading is passive."
No? Further, a system that depended on non-mechanical analysis of
securities would be active as long as the turnover is significant. I
add the turnover caveat since at least one "index", the DJIA, is
essentially actively managed - these stocks are selected. But the index
is changed infrequently, so that a fund based on the DJIA would be a
passive fund, not an active fund IMO.

-Will

[Will Trice]

Beliavsky wrote:

>>On Oct 18, 10:56 am, Will Trice > wrote:
>>>If true, I would then posit that any mechanical system that
>>>does not involve frequent trading is passive. Active strategies would
>>>then be those strategies that are not mechanical (or, thus, passive).
>>>The strategy presented by the OP would then be essentially passive (for
>>>purposes of discussion).
>>>-Will
>>
>
> Both of you have equated "passive" with "mechanical". I don't agree. A
> strategy that bought at the close each day stocks that had fallen from
> the previous close would be mechanical, but since it would have
> turnover exceeding 100, it would not be passive.

I agree, that's why I had the caveat "any mechanical system that
does not involve frequent trading" in the part you quoted above. My
point was that if your strategy was implemented with trades once per
year (although you stated in your last post that trades could occur more
frequently) it would be no more active than a risk-based asset
allocation stategy that rebalanced once per year. Thus if the asset
allocation strategy is passive, then I would think that the low P/E
strategy could be considered passive. I don't think either are
particularly passive, however. But the distinction is not that
important to my point, just the relative equivalence of the activeness
of the two strategies.

-Will

[Ignoramus5114]

To me, there are two independent choices. One is frequent
vs. infrequent trading, and another is self directed investing (buying
individual issues or commodities) vs fund based investing.

These two distinctions should not be mixed, and the terms active
vs. passive, unfortunately, are conducive to that.

I am personally a self directed investor (do not own funds outside of
401K), but I trade infrequently. Most of my liquid assets are, in
fact, in one stock (about 33% of the total wealth and about 50% of
total liquid assets).

i

[kastnna]

On Oct 19, 7:39 am, Beliavsky > wrote:
> Both of you have equated "passive" with "mechanical". I don't agree. A
> strategy that bought at the close each day stocks that had fallen from
> the previous close would be mechanical, but since it would have
> turnover exceeding 100, it would not be passive. The strategy I
> mentioned of buying low P/E stocks and holding them as long as they
> remain low P/E is somewhat active, because stocks would be sold when
> their P/E's rose too high.

Yes, perhaps "mechanical" was not a good choice. My thoughts haven't
been completely formulated, but I think I like Tad's differentiation.

> > The thesis of my early posts is...

> Yes, but that does not mean that the next reader of MIFP that tries to
> do so will fail. My point is that the "barrier to entry" of a
> systematic strategy -- one that can be computerized -- is lower for
> many individuals than the traditional qualitative approach requiring
> in-depth knowledge of the fundamentals of hundreds of companies.

I agree that the next person to employ your strategy will not
invariably fail. That wasn't my intention and I apologize. I also
agree that barriers to entry COULD be lower than other approaches
(including mine), but it would be dependent on the specifics of each
situation. Short and long term capital gains, expense ratios of
investments, and brokerage fees would all factor into which strategy
would be most efficient (ignoring actual returns).

> Your approach of periodic rebalancing of asset classes is reasonable,
> but it could *not* be followed by all investors. Suppose that the
> dollar-weighted optimal allocation of all investors is 60/40 stocks/
> bonds, but that ratio of market caps of stocks to bonds is not 60/40.
> Clearly not everyone can have the optimal allocation. Looking at the
> problem dynamically, suppose that in a bear market the market cap of
> stocks falls by 40% while the market cap of bonds rises. Your
> rebalancing approach would tell people to sell bonds and buy stocks,
> but if everyone rebalanced, who would be there to buy bonds and sell
> stocks?

Again, agreed that my method could not be followed by all (especially
uninformed) investors.

[Tad Borek]

Beliavsky wrote:
> Both of you have equated "passive" with "mechanical". I don't agree. A
> strategy that bought at the close each day stocks that had fallen from
> the previous close would be mechanical, but since it would have
> turnover exceeding 100, it would not be passive.

What about VBISX, Vanguard's Short-term Bond Index Fund? Turnover: 106%,
Category average: 93%. Is that not a passive fund, despite having
above-average and >100% turnover...?

I don't think turnover is dispositive to categorizing a strategy as
active or passive. "Does the firm employ securities analysts?" tells a
lot. As an example, all of DFA's funds are passively managed, and they
don't have any securities analysts (at least, none doing typical
securities analysis). But few of the funds track any index. Arguably
they're nothing more than quant funds based on a specific set of
academic research...quant = mechanical.

Investopedia's definition of "active management" just plain stinks: "An
investment strategy involving ongoing buying and selling actions by the
investor. Active investors purchase investments and continuously monitor
their activity in order to exploit profitable conditions." Any small-cap
value fund constantly monitors every one of its holdings and spits it
out when it's no longer small-cap or value, per the criteria set by the
fund (which might be membership in a small-cap value index, or just a
criteria based on market cap and book-to-market value). And it watches
the rest of the universe of stocks and adds in stocks when they meet the
criteria.

-Tad

[Elle]

"Beliavsky" > wrote
> My point is that the "barrier to entry" of a
> systematic strategy -- one that can be computerized -- is
> lower for
> many individuals than the traditional qualitative approach
> requiring
> in-depth knowledge of the fundamentals of hundreds of
> companies.

I agree the "barrier to entry" for application of a
systematic strategy is now lower, but this is not because
the traditional approach has been fallen by the wayside.
It's simply that the traditional company information that
brokers of, say, the 1970s and earlier sought is more
readily available via the internet and other, near instant
tele-yada-communications. (The internet not being flawless
of course. Then again, greater information access applies to
regulatory yada agencies as well, so with greater
transparency in general, maybe the info we have about
companies is more legitimate these days than in decades
past.) Also, I would not call the traditional approach
"qualitative." A good broker decades ago did sift through a
company's financial numbers, weighing what the numbers said
about the company's health. That's exactly what folks (at
least those who make stock decisions based on fundamentals)
do today when they read those numbers on the net.

Maybe the one wrench in the system that recent decades have
introduced is legitimizing the application of numerology to
stock picking--the use of so-called "technical analysis."

Then again, those employing TA probably are in part
responsible for some of my good fortune. Their losses can
often be my gains.

Just a clarification, at least from where I am sitting.

[Elle]

"Tad Borek" > wrote
> Investopedia's definition of "active management" just
> plain stinks:

You quoted Investopedia's definition for "active investing."
Look instead at its definition for "active management." It's
similar to your definition of "active management."

Still more grist for the semantics mill: Chris Lott's
interesting, investing FAQ site has a good, applied
discussion of active vs. passive at
http://invest-faq.com/cbc/mfund-index.html .

[kastnna]

On Oct 19, 12:40 pm, Tad Borek > wrote:
> Investopedia's definition of "active management" just plain stinks: "An
> investment strategy involving ongoing buying and selling actions by the
> investor. Active investors purchase investments and continuously monitor
> their activity in order to exploit profitable conditions." Any small-cap
> value fund constantly monitors every one of its holdings and spits it
> out when it's no longer small-cap or value, per the criteria set by the
> fund (which might be membership in a small-cap value index, or just a
> criteria based on market cap and book-to-market value). And it watches
> the rest of the universe of stocks and adds in stocks when they meet the
> criteria.

Tad I think investopedia's definition of "active management" is pretty
accurate. Most non-index funds are actively managed. Standard & Poors
thinks so too. The SPIVA report is created to show how those "actively
managed" funds do in comparison to the benchmark index.

For most funds there are managers that buy and sell within a given set
of guidelines in an attempt to outperform the benchmark index against
which the fund is judged. If I hold ADCDX fund for 40 years, I would
say that I have been passive, but the fund may have bought and sold
thousands of investments in that time. How is that not "active"?

[Tad Borek]

kastnna wrote:
> If I hold ADCDX fund for 40 years, I would
> say that I have been passive, but the fund may have bought and sold
> thousands of investments in that time. How is that not "active"?


I don't get your point...what is ADCDX?

-Tad