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Email this12:03 am
April 6, 2013
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Excerpt from a recent Bloomberg article Lies, Damn Lies, and Financial Statistics about the shaky statistical foundations of some newly-created ETF indices:
… To get published in journals, he said, there’s a powerful temptation to torture the data until it confesses—that is, to conduct round after round of tests in search of a finding that can be claimed to be statistically significant. …
The problems [Professor Campbell] Harvey identified in academia are as bad or worse in the investing world. Mass-market products such as exchange-traded funds are being concocted using the same flawed statistical techniques you find in scholarly journals.
… An abundance of computing power makes it possible to test thousands, even millions, of trading strategies. The standard method is to see how the strategy would have done if it had been used during the ups and downs of the market over, say, the past 20 years. This is called backtesting. …
In the wrong hands, though, backtesting can go horribly wrong. It once found that the best predictor of the S&P 500, out of all the series in a batch of United Nations data, was butter production in Bangladesh. The nerd webcomic xkcd by Randall Munroe captures the ethos perfectly: It features a woman claiming jelly beans cause acne. When a statistical test shows no evidence of an effect, she revises her claim—it must depend on the flavor of jelly bean. So the statistician tests 20 flavors. Nineteen show nothing. By chance there’s a high correlation between jelly bean consumption and acne breakouts for one flavor. The final panel of the cartoon is the front page of a newspaper: “Green Jelly Beans Linked to Acne! 95% Confidence. Only 5% Chance of Coincidence!”
…
1:22 am
August 9, 2014
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p - hacking so they say 
.
A person doing research should always create a hypothesis before looking for information, rather than looking through a bunch of data (aka "data mining") and draw the line afterward, as random "false alarm" correlation exist in every data set. This imply the conclusion from said study that involve data mining is not replicable when a different sample is draw from the population (aka the conclusion is null and void!)
Sadly, the scholarly world is becoming a journal factory and academics are require to chuck out certain numbers of articles and publish them regularly in order to keep their job, which pave the way to these types of behaviors.
4:47 am
October 21, 2013
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Look for peer-reviewed journals -and then look to see who the peers are if you can, but this info is not necessarily available. The way it's supposed to work is that a respected journal will only publish articles which have been found by others in the field to be sound - and many do get rejected or sent back for editing. It can be quite a laborious process, and sometimes it takes a couple of years for an article to actually get published in a reputable journal. But even this can be a bit of an "old boys" system, and research which goes against the prevailing orthodoxy may be rejected if someone feels threatened by them.
In the end, it's about the ability to think critically about the claims that are being made, which we all need to be able to do.
Unfortunately, most of the better quality financial journals are not even available to the general public. They are password protected and the subscription fees are so high that only university libraries can afford to buy them, with access severely restricted. This privatization of research knowledge is detrimental to all of us.
A year or so ago I spoke to a "wealth manager" at RBC during a financial show at a convention centre - the kind who is only interested in people who have lots of money. I think his minimum was 500K that they would be willing to invest with him. This is the kind of guy who has lots of "high net worth" clients. He told me he'd been in the business for maybe 25 years -I don't remember precisely. Nice fellow, conservative in approach.
So, I asked him what he reads regularly to keep him up to date. Things like the Wall St Jrl, Barron's, FT etc came up, but there were no scholarly journals whatsoever. I then asked him specifically if he ever reads scholarly journals, and named a couple so that he'd be sure to get the idea, and he said he didn't read any of them, that those were only for people in school. If I ever find one who actually READS, perhaps I'll consider hiring them. They tell us we need them for their expertise and knowledge, but it seems it's mostly to be found in newspapers which we can perfectly well read ourselves.
Genuine scholarly research is not to be feared, but the majority of "information" that is out there is not of this type.
8:02 pm
April 6, 2013
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Jon said
p - hacking so they sayA person doing research should always create a hypothesis before looking for information, rather than looking through a bunch of data (aka "data mining") and draw the line afterward…
They should. But, I think research grant funding is easier to get if one already has some "evidence" for a "discovery".
8:18 pm
April 6, 2013
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Loonie said
…
A year or so ago I spoke to a "wealth manager" at RBC during a financial show at a convention centre - the kind who is only interested in people who have lots of money. I think his minimum was 500K that they would be willing to invest with him. This is the kind of guy who has lots of "high net worth" clients. He told me he'd been in the business for maybe 25 years -I don't remember precisely. Nice fellow, conservative in approach.So, I asked him what he reads regularly to keep him up to date. Things like the Wall St Jrl, Barron's, FT etc came up, but there were no scholarly journals whatsoever. I then asked him specifically if he ever reads scholarly journals, and named a couple so that he'd be sure to get the idea, and he said he didn't read any of them, that those were only for people in school. If I ever find one who actually READS, perhaps I'll consider hiring them. They tell us we need them for their expertise and knowledge, but it seems it's mostly to be found in newspapers which we can perfectly well read ourselves.
…
The "wealth manager" was likely a "dealing representative". In other words, a salesperson. The product salespeople don't need to keep up with all that scholarly stuff.
Knowledge isn't what we need from the financial experts. As you pointed out, anyone can read the newspapers, the company reports, and the textbooks.
What is needed is what is not in those newspapers and textbooks: The experience and the resulting good judgment and instincts. It requires experience to see why things, like covered call option writing, just don't work.
Also, finance is not like medicine where there's frequent discoveries and advancements. I think most of the "innovations" have been in products. Like back-end loaded mutual funds and trailing commissions that hide the sales costs from unsuspecting investors! 
1:38 am
October 21, 2013
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Actually, he really was a wealth manager. He said he was only doing the show to help someone out at the last minute. He gave me his card, and I looked him up on the RBC site, where his photo could be seen, and it was the same fellow. I could never bring myself to deal with him anyway, as the arrangement was one where the person who owns the investments has no say in how they are made beyond the initial intake process and periodic tweaks in goals. It's supposed to free you up from all that nasty worry, but it would just make me worry more.
I just wonder what these people do all day. Most of the portfolios they construct seem very similar and I think the whole thing could almost run on autopilot. We are told that a good portfolio requires few trades. This fellow told me he's been doing it for perhaps 20 years or so and has a stable clientele. "I've never lost a client", said he. I notice that people I know who use them seem to have about the same results over time with different practitioners. In a large firm like RBC, I am sure there are lots of templates and tips so that little originality is required (and is probably a bad thing), especially for a conservative client. So, really, what is there to do? Pick up a coffee and read the Wall St Journal, I guess...
The next time I get to interview one of these people, I'm going to ask what their day looks like! This will be after I've found out how often he expects to be calling his clients.
Unlike you, Norman, I really do want people who read in depth. They all work out of some theories about how things work and don't work. The lesser ones are not aware of the theories, and just assume them as truth. The better ones ought to be able to critique the theories and show why they work and talk knowledgably about how they are holding up. Nobel prizes are given for them, and strategies emerge from them which are widely embraced - until they prove inadequate to explain reality. Theories are always subject to revision, and so, some years down the road, another Nobel is given for a newer understanding.
I am looking for someone who is self-aware, who knows the theories and knows they are subject to failure and can talk about the strengths and weaknesses and make some rational careful conclusions. But I have little hope of finding such a person. All the advice says you should find someone you're comfortable with, someone you trust. Never have found this person.
I haven't seen anything yet that proves you will do better with them than with robo. The latter are springing up like crocuses in Spring! And this brings the next dilemma. It could be just as much work to pick one of them as it is to pick a wealth manager.
https://www.thestar.com/business/wealth/2017/04/03/robo-advisors-now-seeking-high-net-worth-clients.html The one that offers free airport lounge passes sounds nifty - better than collecting AirMiles!
9:32 am
September 11, 2013
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40-odd years ago my future father-in-law, who had spent his life studying investing, told me to just keep putting every dollar I can into Canadian dividend-paying blue-chip stocks and ignore everything else. Don't know why but I pretty much followed his advice, spent virtually no time reading anything about money, and today it's paid off more than I ever dreamed - I can even take some dough and put it into "high" interest savings accounts in case the markets ever really blow up for a long time (he also cautioned me that it took until the 1950s for the markets, and for real estate, to get back to the levels of 1929). Who knows, maybe the same advice will work out for some young folks today? Cuts down on the reading time, if nothing else.
2:32 pm
October 21, 2013
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You were lucky that someone had done the reading for you, Bill, and that you did as you were told as a young man. It sounds like you are still following his advice.
I find that virtually none of the professionals in the field today (except the doomsday prophets who make a living out of being negative) are willing to entertain the serious possibility that we might face a major crash followed by a 20yr+ recovery period. When crashes come, they are always declared to be a "surprise". They all claim "nobody saw it coming". The fact that they could not afford to see it coming is never mentioned.
7:55 pm
April 6, 2013
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Loonie said
Actually, he really was a wealth manager. …
Not quite sure what that is. Is that an investment counselor, portfolio manager, or financial planner?
I just wonder what these people do all day. Most of the portfolios they construct seem very similar and I think the whole thing could almost run on autopilot. We are told that a good portfolio requires few trades. … This will be after I've found out how often he expects to be calling his clients.
They are expected to meet with their clients quarterly. With 500 clients, that would be about 500 hours a quarter in meetings.
Unlike you, Norman, I really do want people who read in depth. They all work out of some theories about how things work and don't work. The lesser ones are not aware of the theories, and just assume them as truth. …
Are we looking for a fancy hedge fund manager to "shoot out the lights" or an investment counselor to achieve respectable returns?
Respectable returns don't require Nobel prize winning theories to achieve. The theory is not that hard. It is following through with what the theory directs that's hard.
I am looking for someone who is self-aware, who knows the theories and knows they are subject to failure and can talk about the strengths and weaknesses and make some rational careful conclusions. But I have little hope of finding such a person. All the advice says you should find someone you're comfortable with, someone you trust. Never have found this person.
You may not find that in the one contact person. All that may rest with other members of the team beside the main contact.
I haven't seen anything yet that proves you will do better with them than with robo.
That depends on the client. If one can buy low when one should and can resist chasing overpriced stocks, then either will be fine. Some people need to have someone there to do the right thing.
8:16 pm
April 6, 2013
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Loonie said
… I find that virtually none of the professionals in the field today (except the doomsday prophets who make a living out of being negative) are willing to entertain the serious possibility that we might face a major crash followed by a 20yr+ recovery period. When crashes come, they are always declared to be a "surprise". They all claim "nobody saw it coming". The fact that they could not afford to see it coming is never mentioned.
No-one does see it coming. Anyone who did would make lots of money shorting index futures. With a 10:1 leverage, one could make 100% for each 10% drop in the index.
I don't think we've have had a 20+ year recovery. If one had bought the S&P 500 in January 1929, before the big crash in October, one would have recovered by January 1945 with a +30% return according to this S&P 500 Return Calculator, with Dividend Reinvestment.
By January 1949, the 20-year mark, one would have been up about 83%!
12:03 am
October 21, 2013
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Wealth manager may go by other names. They won't deal with anything less than 500K or even 1 million in some cases. They take a percentage of your assets. And they make all the decisions.
Anybody who has 500 clients is not giving any of them personal attention and will never have any time for much more than reading the Wall Street Journal. I would recommend staying away from them. The people I know who have such accounts do not receive 4 calls a year - usually one or two.
In fact, the arithmetic suggests it's not even possible, considering that there will inevitably be other internal duties and meetings to attend, vacation, statutory holidays and illness. And, from what I have heard, most of the time in these meetings is spent making reassuring noises in order to retain the client. The question is, what portion of their time is spent doing something which really adds value? None if they have 2000 meetings with clients per year at one hour each, not to mention prep time and follow up time. Evan a half hour is stretching it. PWL Capital - the company that interests me the most - promises one or two meetings per year.
Someone who reads and learns is not equivalent to a hedge fund manager. It is someone who knows they don't know everything.
A great deal of investing systems and advice do in fact rest on Nobel prize winning theories, but people don't realize this because they haven't read about it.
David Chilton did a pretty good job of debunking the idea that managed funds can outdo the markets over time, using math. Even harder for individuals. See The Wealthy Barber Returns.
It's a much better book than I thought it would be. His catchy style almost hides his strengths.
If more people did more dispassionate analysis, they might indeed see things coming. It was unreasonable to think that the price of tulips would continue to skyrocket in the 1600s, and it was unreasonable to think that subprime mortgages were sustainable more recently. What is unreasonable now? I could make a few suggestions, but they would not be popular.
Economic history is not even taught in some curricula and is certainly not well understood among most investors.
If nobody ever sees anything significantly bad coming (which I doubt), then I have to ask why not. Clearly the models of thinking are inadequate, and more research and reading is essential.
I plan on reading these books in the next little while in order to better understand future possibilities:
GDP: a brief but affectionate history. by Diane Coyle. Princeton Univ Press, 2014. True to its word, only 159 pages.
The black swan : the impact of the highly improbable
2nd ed., by Nassim Nicholas Taleb. New York: Random House, 2010.
Both authors have considerable real world experience and distinctions as well as holding PhDs - one from the Sorbonne and the other from Harvard. Taleb has a Wharton MBA for people who feel that's important.
When I find a financial advisor/planner/manager who has read widely and reflected thoughtfully on it, they will definitely attract my attention. I'm sure there's one out there somewhere... All it takes is one - whose book isn't full.
And, yes, a FI with a team for you has an attraction.
I wouldn't have thought 83% was a very good return after 20 years, but it would also depend on inflation and returns on other investments by comparison.
6:32 am
December 17, 2016
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Diane Coyle & Nassim Nicholas Taleb
Oh great, more economists living in their academic/theoretical world, never having to prove themselves in the practical world. As a former boss used to say ...
"economists are a dime a dozen and I wouldn't give any dime for any dozen"
-----------------------------------------------
I'm always reminded of the now infamous Alan Greenspan
"Alan Greenspan, the former chairman of the Federal Reserve, proclaimed last month that no one could have predicted the housing bubble. “Everybody missed it,” he said, “academia, the Federal Reserve, all regulators.”"
"Mr. Greenspan said that he sat through innumerable meetings at the Fed with crack economists, and not one of them warned of the problems that were to come."
"with crack economists" - hmmmm ... as in sharp or high on?
12:30 pm
October 21, 2013
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It's laughable to compare Taleb to Greenspan. They couldn't be more different. Also, he's not an economist as far as I can tell. And, lastly, he made megamillions foreseeing the downturns of 1987 and 2008 by putting his money where his mouth was.
However, I haven't read these books yet and am not about to argue their merits. For those who like to expand their horizons and read different points of view, they may prove interesting, but it is no concern of mine if you do not.
4:43 pm
December 17, 2016
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I wasn't comparing Greenspan to anyone, I was merely citing how little regard the world has in the credence of economists and Ouija board dabblers.
6:12 am
December 17, 2016
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Loonie said
For those who like to expand their horizons and read different points of view ...
Given your stated quest, this may prove a welcome addition to your bedside table of reading -
Set Free: A Life-Changing Journey from Banking to Buddhism in Bhutan by Emma Slade
6:35 pm
April 6, 2013
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Loonie said
Wealth manager may go by other names. They won't deal with anything less than 500K or even 1 million in some cases. They take a percentage of your assets. And they make all the decisions.
Just make sure the person is actually an investment counselor or portfolio manager.
Discretionary accounts can also be offered by "dealing reps". That would be like letting a car salesperson choose one's car and its price.
Anybody who has 500 clients is not giving any of them personal attention …
In fact, the arithmetic suggests it's not even possible, considering that there will inevitably be other internal duties and meetings to attend, vacation, statutory holidays and illness. And, from what I have heard, most of the time in these meetings is spent making reassuring noises in order to retain the client. The question is, what portion of their time is spent doing something which really adds value? None if they have 2000 meetings with clients per year at one hour each,…
Of course a single investment counselor can't have 500 separate unrelated clients. That doesn't mean they can't have 200 or so couples. Not everyone will need to meet every single quarter. Some of the more sophisticated clients will realize that three months is quite a short time for investments.
The "handholding" is part of the value they bring, to both retain the client and discourage the client from doing something regrettable (like selling in 2009 or switching from all those conservative blue chip stocks in 1999 to the overvalued tech stocks their taxi driver neighbour made 80% the past year in).
Someone who reads and learns is not equivalent to a hedge fund manager. It is someone who knows they don't know everything.
A great deal of investing systems and advice do in fact rest on Nobel prize winning theories, but people don't realize this because they haven't read about it.
The theories do provide a framework to measure and test portfolios once they are constructed to see if they imply something insane. If you are thinking about Markowitz's Modern Portfolio Theory in 1952, that's what it provides.
I don't Markowitz actually discovered anything revolutionary. He just provided a quantitative model for something portfolio managers used to do qualitatively and instinctively.
I don't think there has been much to miss in the academic financial journals.
6:57 pm
April 6, 2013
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Loonie said
David Chilton did a pretty good job of debunking the idea that managed funds can outdo the markets over time, using math. Even harder for individuals. See The Wealthy Barber Returns. It's a much better book than I thought it would be. His catchy style almost hides his strengths.
If that is referring to the chapter "Incredibly Interesting Math", then he did not show that. Not every portfolio can have above-average results. But, a market index is a barometer of the market. A market index is not the average of all the actual investment portfolios in that market.
If more people did more dispassionate analysis, they might indeed see things coming. It was unreasonable to think that the price of tulips would continue to skyrocket in the 1600s, and it was unreasonable to think that subprime mortgages were sustainable more recently. What is unreasonable now? I could make a few suggestions, but they would not be popular.
Economic history is not even taught in some curricula and is certainly not well understood among most investors.If nobody ever sees anything significantly bad coming (which I doubt), then I have to ask why not. Clearly the models of thinking are inadequate, and more research and reading is essential.
The signs are always ambiguous. If I yell "market crash coming" long enough, I will eventually be right. I remember Ravi Batra's book The Great Depression of 1990 all over the bookstores after the 1987 crash. Maybe he was just 2008 - 1990 = 18 years ahead of his time!
If someone could predict, then he or she could make large amounts of money selling index futures in the futures market. With a 10:1 leverage, every 10% drop in the underlying index would result in a 100% gain on the margin deposited.
The reality is that financial markets are not predictable the same way the weather is also not predictable. Both are non-linear systems in which small causes can have large effects on the outcome.
I think the chaos theory metaphor is "A butterfly flapping its winds can affect the weather days from now." 
10:45 pm
October 21, 2013
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Norman1 said
Loonie said
David Chilton did a pretty good job of debunking the idea that managed funds can outdo the markets over time, using math. Even harder for individuals. See The Wealthy Barber Returns. It's a much better book than I thought it would be. His catchy style almost hides his strengths.If that is referring to the chapter "Incredibly Interesting Math", then he did not show that. Not every portfolio can have above-average results. But, a market index is a barometer of the market. A market index is not the average of all the actual investment portfolios in that market.
If more people did more dispassionate analysis, they might indeed see things coming. It was unreasonable to think that the price of tulips would continue to skyrocket in the 1600s, and it was unreasonable to think that subprime mortgages were sustainable more recently. What is unreasonable now? I could make a few suggestions, but they would not be popular.
Economic history is not even taught in some curricula and is certainly not well understood among most investors.If nobody ever sees anything significantly bad coming (which I doubt), then I have to ask why not. Clearly the models of thinking are inadequate, and more research and reading is essential.
The signs are always ambiguous. If I yell "market crash coming" long enough, I will eventually be right. I remember Ravi Batra's book The Great Depression of 1990 all over the bookstores after the 1987 crash. Maybe he was just 2008 - 1990 = 18 years ahead of his time!
If someone could predict, then he or she could make large amounts of money selling index futures in the futures market. With a 10:1 leverage, every 10% drop in the underlying index would result in a 100% gain on the margin deposited.
The reality is that financial markets are not predictable the same way the weather is also not predictable. Both are non-linear systems in which small causes can have large effects on the outcome.
I think the chaos theory metaphor is "A butterfly flapping its winds can affect the weather days from now."
I'm not going to respond to all of your posts as I don't think there would ever be an end to our disagreements on these issues. And I'm not sure if anyone would benefit from it.
I am surprised that you value managers so highly. It's not just Chilton who has noticed the problem with them, as I'm sure you know. Right now, the trend is away from them entirely.
"Handholding" is not, in my opinion, any kind of value, and certainly not one that people should pay 1-3% for, especially in an environment which returns 3-6%. You can have your hand held while drowning just as easily as while being rescued, but you won't know which it was until later.
Chilton is no fool, and his math made sense to me. I think he understands the material very well. However, I no longer have the book as it went back to the library. He did come first in the country in the Canadian Securities exam the year he took it. That puts him miles ahead of all the other financial professionals I have spoken to, none of whom seemed particularly bright or inspiring of my confidence. If I ever found one that was, I would certainly stick with them.
You seem to assume that nobody ever made any money off predicting that markets would fall because, if they did, you think they'd be dealing with futures and getting rich. That's an assumption, and it's an easy convenient one to make. You don't know how many people did exactly that or how much money they made. Taleb, for example (I believe it was an interview in The Guardian, but can't remember for sure), says he made $50 million on the 2008 debacle, and also a large amount unspecified in 1987. He is a very wealthy man and apparently turns back his academic salary to the university. None of us have access to his accounts, but that doesn't give us reason to assume he did not make the right call, or that nobody else did.
You say that markets are completely unpredictable, yet you have solid faith that they will succeed over time. There is a contradiction there. However, I understand from your previous comments that you base your confidence on long term trends. But even these are unpredictable. Expectations for the future are a matter of faith based on what has happened in the past - the very thing that we are always told not to trust as a predictor of the future.
A month or two ago, I asked Dan Bartolotti, formerly of MoneySense magazine and now with PWL Capital, in person and in public, why he felt that it still made sense to be invested in stock market ETFs since his own statistics clearly showed that over the last 20 years one would have done almost as well in bonds/GICs with almost no risk and without the wild swings. He didn't deny the facts nor did he seem interested in the question. His answer was that that particular scenario was not going to be repeated. He didn't see it coming 20 years ago, I daresay.
I also remember buying long bonds in the 1990s while our then-broker was all but outright discouraging, making it sound like these would be quite a problem for him to get (BS!) and wanted us to buy other things. If he'd been more supportive, I have no doubt we would have bought more long bonds and been very satisfied with them. Most of us start out young and naive. By the time we figure out what's going on, it may be too late.
Either we can see what is coming or we can't. Most of us would probably say that we can't. A smaller number would conclude that this leaves us open to any possibility. But if there is someone who is wiser about this than the rest of us and has the track record to back it up, then I'm definitely willing to listen. If I ever hear anything that sounds credible, I might follow. So far, all I've ever heard is that things are not predictable but somehow they will be predictable over the longer term. This is all based on hindsight, which you find unimpressive as a foundation for economic theory. To the extent that it's based on foresight, it has to do with the viability of nations, companies and markets, but that too can change. In a world as unstable as the one we currently live in, nothing seems terribly reliable to me.
1:31 pm
April 6, 2013
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I have a lot of respect for David Chilton. He quite literate financially. The Wealthy Barber Returns is excellent. I did read the book and would have remembered something as significant as a proof that index funds are the best.
I have the book. Looks like we are indeed talking about the chapters "Incredibly Interesting Math" and "When Average Isn't". Those chapters do prove that not everyone can have above-average results. Mathematically, that is easy. There will always be at least one item, included in an average, that is below average unless all the items are exactly the average.
However a stock market index like the TSX 300 is not an average of all the stock portfolios. We don't have an index that is the average of all the stock portfolios. Consequently, the TSX 300 does not constrain the performance of individual portfolios in any way.
1:55 pm
April 6, 2013
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Loonie said
I am surprised that you value managers so highly. It's not just Chilton who has noticed the problem with them, as I'm sure you know. Right now, the trend is away from them entirely.
"Handholding" is not, in my opinion, any kind of value, and certainly not one that people should pay 1-3% for, especially in an environment which returns 3-6%. You can have your hand held while drowning just as easily as while being rescued, but you won't know which it was until later.
Handholding is quite valuable when it corrects natural tendencies to do the wrong thing. I'm sure those who thought they were "drowning" in that 2008 meltdown and took the advice to hang in there are quite happy now, in hindsight.
As a DIY investor, I know it is not easy to buy when things are low and sell when things are shooting for the stars. Why not load up on that telecom mutual fund after it had a return of 80% the previous year?
It's not the fancy theoretical calculations of portfolio beta or Sharpe ratios that adds the most value. Investing money that I don't need for 10 years or more into stocks, instead of parking the money in GIC's and bonds, doesn't sound like much to pay for. Same with investing in blue-chip dividend paying stocks over those micro caps and penny stocks. But, in hindsight, those have made a lot of difference for me.
If an investment counselor could have convinced me of those a decade earlier instead of me learning it the hard way, then that 1% or 2% fee a year would be easily covered.
People are moving away from professional management because of the phonies in the business. At the high end, there are closet indexers who charge for active management but don't really do anything. At the bottom, there are the salespeople posing as "financial advisors" giving supposedly objective advice.
Please write your comments in the forum.