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Forecasting Never. Works

i Guys,

We think deeply and often talk about our strategies to outperform the various markets, but our success rates are close to dismal. No, I’m wrong! They are dismal. Only about 5% of us manage to win this challenging task! Why?

We underestimate the many factors that both influence the complex marketplace while we consistently overestimate our abililiries to evaluate them. That is a recipe for disaster, and disaster is indeed the common ending. It seems like the less I try to outplay this game, the better I do. These days I just ignore the daily predictions and their predictors. This works for me. Trying harder generates poorer outcomes for me. What works for you?

Here is a Link to an article with a few insightful and interesting comments and statistics.

I especially liked the following paragraph:” Similarly, over the 15-year investment horizon, 92.43% of large-cap managers, 95.13% of mid-cap managers, and 97.70% of small-cap managers failed to outperform on a relative basis.“

I wish you all successful investing and realize the huge odds against that global outcome. We can’t all be winners.


  • If you watch Charles Ellis's WealthTrack presentation that @bee posted, he comes to the conclusion that today the challenges to out-perform the broader market is nearly impossible. Availability of information, hardware and people talent make it much harder to make the right decision.
  • If forecasting never works, why should one invest in the stock market at all and why does our society allow everyone's retirement to be dependent upon something that is completely unpredictable? Isn't "in the long-run stocks go up" a forecast?
  • Thanks for sharing. If I understand the premise of the article - it's really about Index Funds vs. Active Management. It makes a compelling case for just investing in the S&P 500 Index and not trying to find the "hot hand" or chase a portfolio manager because they can't consistently beat the Index 95-97% of the time. It's what Warren Buffett is doing with his money when he passes away.

    I understand the Index vs. Active discussion and I own some index funds. I agree that it's very difficult to have a portfolio that consistently beats the S&P over the long term.

    Using MFO Premium ... let's take BFGFX as an example. The fund has been around for 14 years. It's +4.8 to the S&P over the life of the fund. It's APR has never trailed the S&P in it's history and last year it beat the S&P by 96.7 and +31.7 the year before.

    Would it be safe to assume that this fund is part of the 3-5% that found a way to beat the S&P 500 Index (at least over the last 14 years)? What am I missing? Or is that the point? We won't be successful at trying to beat it over the long term. Genuine ?
  • @JonGaltill You are correct that these kinds of stories are always about active versus passive, but the implicit assumption in them is instead of going active one should just buy and hold an index fund and in the long run one will benefit. But there is an element of forecasting in that too, a fundamental belief in the stock market perpetually rising, with a few hiccups along the way.
  • edited February 2021

    Great post.

    It's a tired old debate that at best provides confirmation bias to those who want to believe it or just don't want to try to beat the market.

    To wit: I own 11 dedicated, actively managed stock funds. All 11 easily beat-to-blow away their bogeys. 10 of 11 do the same vs the S&P, the only one being a SCV fund that I bought last year. This scenario has been the case with my port for about 40 years now.

    When I say blow away, I mean blow away....

    I don't own it any more, but take a look at FLPSX, which I bought near its inception and owned (as my only fund for about five years circa early 90's and) all the way up to the last couple of years.

    Value of $10K, 12/27/89 to Current:
    VFINX: $208,480
    S&P 500 TR: $215,986
    FLPSX: $495,523

    Note: There are no typos there and your eyes are NOT deceiving you.

    True, LOTS of funds fail to beat their bogeys and many come nowhere close to matching the S&P. That's why statistically writers can truthfully pump out hair-on-fire (Thanks, Dick!) articles like these.

    It's really not that hard to beat the market. Simply BUY the funds in the smaller percentile that ALWAYS do, or at least ALWAYS do over time.

    Also, use of the word "NEVER" is usually not a good idea in these contexts. LOTS of PMs and analysts last year predicted Small Caps, Value, Foreign and EMs were places to be this year. So far, they weren't right, they were very right.
  • It's really not that hard to beat the market. Simply BUY the funds in the smaller percentile that ALWAYS do.
    OK, that's funny, like saying It's easy to get a 100 on a test. Just don't get anything wrong.
  • MJG
    edited February 2021
    Hi Guys,

    On reflection, never works was too strong a conclusion. I believe my proclamation should have been qualified with an almost never works statement. Never is too absolute. The real world is not that simple (I had to resist using never once.again). Thank you all for your insightful comments on this topic

    I am in a constant learning mode. Wise investing is indeed a hard challenge that demands constant adjustment updates. Things are almost ( see, I do learn) never constant. Change happens.

    I wish you all successful invest returns. Skill, but good luck is also needed.
  • edited February 2021

    It's really not that hard to beat the market. Simply BUY the funds in the smaller percentile that ALWAYS do.
    OK, that's funny, like saying It's easy to get a 100 on a test. Just don't get anything wrong.'s not intended to be funny, rather instructional.

    What I'm saying is the funds that routinely beat their bogeys and/or the S&P are relatively easy to find because they pretty much do it ALL THE TIME.

    FIND them. BUY them. Repeat.

    HINT: Perform screens to identify the funds that are 5* funds for 3, 5 and 10 years, appear at/near the top of the screens in ALL of those columns and the 1-yr, YTD and Life of Fund columns. Dig a little deeper with your DD, especially regarding the PM(s), and select the very best.

    Fido even assists investors by identifying "Fund Picks from Fidelity." You can probably even routinely beat their bogeys and/or the S&P if you just bought those.

    But no, I'm not inclined to spoon feed them here. Several though are littered throughout my posts. If you swing and miss on one, not to worry as you likely blew away their bogeys and the S&P with the others.

    Just don't EVER think you can pick THE ONE fund that's the best. Select 2-3 in each cat and if you did it properly, you very likely scored BIG on at least one or two of them. How many mistakes you think you could have made and STILL outperformed bogeys/S&P if you would have JUST bought and held FLPSX (see my prior post) from its inception?

    Many investors have been coded to think that this is either impossible or will take too much of their time. And that's unfortunate.
  • edited February 2021
    The challenge is to find persistence long term out-performance thru full market cycle. The The dominance of FANNG stocks in S&P500 is not easy to overcome. Perhaps the hurdle is lower in smaller cap funds.
  • edited February 2021
    What I'm saying is the funds that routinely beat their bogeys and/or the S&P are relatively easy to find because they pretty much do it ALL THE TIME.
    No, they aren't easy to find and no they don't do it all the time.
    In fact, if you include 2008 into any stock benchmark comparison and go until 2021, you probably won't find a single large-cap blend fund that beat the S&P 500 every calendar year. Even the best managers have fallow periods and performance tends to be lumpy. I doubt you've looked at the truly long-term history of most funds and I doubt you've made apples-to-apples comparisons for funds investing in similar style/size stocks to the benchmark. FLPSX is an exceptional fund, but it is not a fund to compare to the S&P 500, but to a mid-cap value benchmark currently and shifting benchmarks throughout its history, but almost never large-blend like the S&P 500 I bet. And it too has had lagging years versus its Morningstar benchmark, 2016 notably. In fact, if you look at the three-year period of January 1, 2014 through December 31, 2016 of FLPSX versus the IWS mid value index ETF, you would've seen IWS produce a 32% return versus FLPSX's 17%--a significant underperformance during a three-year period. And yet FLPSX remains a great fund.
  • Using Portfolio Visualizer from 1/1/08 to 2/05/2020-$10000 beginning balance PRBLX 34,714
    VFIAX 27,452. Since I'm a tech-luddite I can't link to the screen. Maybe use 2 different funds in case 1 turns into the next Sequoia or Third Avenue Value !
  • edited February 2021
    PRBLX's poor years against its large-blend benchmark were 2017 especially, but also 2015 and 2016. Yet another strong fund overall.
  • MJG
    edited February 2021
    Hi Guys,

    The historical data suggests that outperformance on the plus side persists in the short term but ultimately it regresses to the average. Underperformance is far more persistent.

    Here is a useful Link:

    Here is a good summary quote from that article:

    “The only significant persistence not explained is concentrated in strong underperformance by the worst-return mutual funds. The results do not support the existence of skilled or informed mutual fund portfolio managers.”

    Luck happens but doesn’t persist. Poor invest decision making does seem to persist unfortunately. It seems like the negative outcome always seems more robust. I wish good luck to all, even for the short term.
  • This is a good discussion. If we ignore bonds for the moment. Buffett and the Index proponents say don’t try and beat the market. Just own the market. Most say an S&P 500 or Total Market Index.

    Ok, so if we ignore bonds (for diversification or income etc) and we just consider equity funds.

    Is it not possible to find equity funds that consistently best the S&P 500 or TSMI on a long term basis? Not sometimes but consistently? Over 10-20 year periods. Maybe they miss 1 or 2 years but over the life... they beat the S&P. The BFGFX did for 14 years. I don’t own this fund.

    That’s my goal. Identify and invest in mutual funds that outperform the S&P 500. Yes I look at APR vs peers BUT... if the smartest investors in the world like Buffet and Bogle... advise to just index... that’s my real benchmark. So, even though some funds may handily outperform their peers, if they don’t consistently beat the S&P and I’m not using it for diversification purposes (like a bond fund or allocation), then I look elsewhere. Thoughts on this strategy for equity funds?
  • I own both active and passive funds.
    Investors should be mentally prepared for active funds to periodically underperform their relevant benchmarks.
    I agree with @LewisBraham that it is difficult to find active funds which will outperform their benchmarks over the long-term (10 yr, 15 yr, etc.). PDF

    Many intelligent, highly-educated portfolio managers compete against each other.
    Company* and stock market information is now readily available to all.
    This makes it extremely challenging for anyone to gain an edge.
    The higher costs of active funds are also an important factor since they detract from returns.

    *Regulation FD was enacted in October 2000 to prevent selective disclosure of material nonpublic information. Link
  • @observant1 thanks for sharing the spiva pdf. Page 4 is interesting - the table shows that over a 15 year period, 92.35% of all Large Cap Growth equity funds failed to beat their benchmarks. I guess that is what you and others are trying to say. I understand that data and agree it’s not easy and there’s a strong compelling case to just index.

    If you choose some active LC growth funds and set and forget them for 15 years, 92.35% of the time you will be disappointed as they won’t beat their benchmarks. Since you and I own active funds, aren’t we saying that by using our tools, we think that we can maneuver in and out of these funds before we are disappointed and thereby beat the benchmarks? Not often - just when performance “consistently” underperforms.

    I don’t mean to be simplistic, it’s just that I was an index only investor for a number of years and I’m constantly second guessing myself since owning active-despite positive results. This discussion and the feedback is helpful to me.

  • Very interesting thread.

    I do have one question. Is the index out-performance risk-adjusted?

    Although a particular managed MF may not beat its bogie, it may provide downside protection and superior risk-adjusted returns.

    Any thoughts???

  • It's interesting but not news. People have known for decades now how difficult it is for active funds to beat the benchmark with any consistency--and the consistency part is perhaps not dicussed enough. My problem is with the basic assumption, i.e., forecast, that stocks themselves will always be a good investment and this assumption is implicit in the decision to index the benchmark, and in investing in many active funds that rigidly adhere to a particular stock-driven investment style. The indexing decision assumes that the benchmark itself isn't really dynamic, that the S&P 500 today or better yet the Russell 3000 is really the same as it was yesterday, last year, ten or fifty years ago and plunking one's money into it at any point in time in the future will always be a good choice. What we know is historically it has been a good choice in the past most of the time. But there are a periods of time--periods of extreme over- and under-valuation--where it's been a terrible or terrific choice. One could argue that now is one of those times. Moreover, no one knows what the future will bring and the data-set for stocks overall is extremely limited versus human history, and a grain of sand in biological, or worse, geologic history. There is nothing particularly scientific in other words in assuming that in the long run stocks go up. All we know is in the past stocks have gone up.
  • edited February 2021
    stillers said:

    To wit: I own 11 dedicated, actively managed stock funds. All 11 easily beat-to-blow away their bogeys. 10 of 11 do the same vs the S&P, the only one being a SCV fund that I bought last year. This scenario has been the case with my port for about 40 years now.

    When I say blow away, I mean blow away....

    I thought we were friends. I thought we were ALL friends at MFO. Lynn Bolin for example, shares and shares, as do so many others. You know of 11 funds that blow away their benchmarks, just make them look like fools, and you won’t share one? Not even one? I am sad!
  • "All we know is in the past stocks have gone up." That's good enough for me, once we consider the manifold reasons why that has generally been the case.
  • edited February 2021
    @sfnative Elaborate. State the manifold reasons in your view. They're worthy of discussion. If it's falling interest rates, that's done. If it's attractive valuations, gone too. If it's America's economic dominance, that is up for grabs. Maybe, maybe not. There is one reason, though, I can think of that is very important and still valid--the constant need to make the rich and powerful grow even more rich and powerful, provide them whatever they need to keep the stock market rising--tax breaks, Fed bailouts, interest rate cuts, anti-competitive monopolies that would never have existed in the trust buster era, union busting, gutting environmental regulations and pretending climate change doesn't exist, minimum wage supressed, 17-year patents on me-too drugs that have one molecule of difference with the last me too drug.

    Our government has tilted in that direction since the 1980s and I don't see any real difference in the current administration. In fact, I think the phrase "income inequality" is baked into the "in the long run stocks go up" thesis. So you may be right. In fact, in the other discussion on Grantham's bearish predictions being wrong one thing not discussed is a rather famous mea culpa he made a few years ago about not realizing how corporate power has grown in recent years so that monopolistic dominance that wouldn't have been tolerated in earlier eras is now permitted. That dominance is baked into the returns of bellwether tech stocks and the benchmarks themselves. In other words, there aren't too many search engines people use besides Google's. The fact that market-cap weighted index funds keep buying those bellwether tech stocks creates a kind of feedback loop, making them more powerful and driving their stocks even higher.

  • Well put Lewis. The rich, who own the majority of all of this, won't make themselves poor.
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