I recently wrote a post about the empirical observation that the bulk of the alpha generated by active managers is generated by their high conviction bets while their low conviction active bets tend to have a zero or even negative contribution to the portfolio’s active performance.
Hi JK - You have raised some interesting points and I need to think about this some more. I will discuss with a business partner and get back to you. Hope all is well in London.
Hey JK and Pete, just stumbled on this blog via Google. I want to respond to this piece but I realize it's challenging because I'm just a retail investor and this seems to be more of a "how can an asset manager determine who is skilled/unskilled" type of thing.
But I'd like to throw a bunch of things out of my head to start a convo.
What kind of time frame are we looking at to even know if a manager is skilled? How/when would we even know they chose a superstar stock?
You linked a blog post where you were pretty happy with your Spring 2020 results, but you definitely did point out that the time frame was obviously too small to judge. Is Cathie Wood skilled? Considered a genius at her peak, but now... Was she just lucky? Time frame is too small to tell.
I'm also not sure I understand the final example. Sure maybe the diversified skilled investor is not good at finding the superstar stock but it's weird to me that the expected return is indifferent when we're assuming skill here unless the thought experiment is all about finding the superstar stock vs. just outperforming the market.
I apologize in advance, I haven't read all your other work, so this is coming from a place of only reading this work.
Coming from a high level poker / sports betting background with connections in the casino world, it would also make more sense to me that it would be easier to identify a skilled manager if a person makes more bets. A random person can win a few bets here and there, but make them make 100+ bets and it is unlikely that they'd be able to deceive in being a profitable gambler.
It launches a lot of questions in my head:
- How many stocks are underpriced at a given time?
- How hard is it for a skilled manager to identify them? Are there so few at a time?
No problem. Admittedly this blog morphed from a blog for retail investors into a blog for professionals as I changed jobs and now serve fund managers. In any case the question about time frame is the right one with a depressing answer. If you look for statistical significance at a 5% level, you need about 15 years or more performance to distinguish between a skilled and unskilled manager. Hardly any fund manager has that kind of a track record.
So as a practical matter I typically look at the performance of a manager over a cycle, including at least one bill market and one bear market. As for Kathie Wood she has proven that she is, like so many find managers, a good manager in a bill market and a bad manager in a bear market. So I doubt she has skill.
Hi JK - You have raised some interesting points and I need to think about this some more. I will discuss with a business partner and get back to you. Hope all is well in London.
Regards,
Pete
Hey JK and Pete, just stumbled on this blog via Google. I want to respond to this piece but I realize it's challenging because I'm just a retail investor and this seems to be more of a "how can an asset manager determine who is skilled/unskilled" type of thing.
But I'd like to throw a bunch of things out of my head to start a convo.
What kind of time frame are we looking at to even know if a manager is skilled? How/when would we even know they chose a superstar stock?
You linked a blog post where you were pretty happy with your Spring 2020 results, but you definitely did point out that the time frame was obviously too small to judge. Is Cathie Wood skilled? Considered a genius at her peak, but now... Was she just lucky? Time frame is too small to tell.
I'm also not sure I understand the final example. Sure maybe the diversified skilled investor is not good at finding the superstar stock but it's weird to me that the expected return is indifferent when we're assuming skill here unless the thought experiment is all about finding the superstar stock vs. just outperforming the market.
I apologize in advance, I haven't read all your other work, so this is coming from a place of only reading this work.
Coming from a high level poker / sports betting background with connections in the casino world, it would also make more sense to me that it would be easier to identify a skilled manager if a person makes more bets. A random person can win a few bets here and there, but make them make 100+ bets and it is unlikely that they'd be able to deceive in being a profitable gambler.
It launches a lot of questions in my head:
- How many stocks are underpriced at a given time?
- How hard is it for a skilled manager to identify them? Are there so few at a time?
No problem. Admittedly this blog morphed from a blog for retail investors into a blog for professionals as I changed jobs and now serve fund managers. In any case the question about time frame is the right one with a depressing answer. If you look for statistical significance at a 5% level, you need about 15 years or more performance to distinguish between a skilled and unskilled manager. Hardly any fund manager has that kind of a track record.
So as a practical matter I typically look at the performance of a manager over a cycle, including at least one bill market and one bear market. As for Kathie Wood she has proven that she is, like so many find managers, a good manager in a bill market and a bad manager in a bear market. So I doubt she has skill.