THE BOOK--Playing The Percentages In Baseball

The rapid pace of Cramer’s show and the fact that the producer put up a graphic of the stock price makes this unclear, but I think the question he received ("in terms of liquidity") was asking whether the person should take their money out of their account at Bear, not whether they should invest in Bear stock.
So, while he’s wrong a lot of the time, this isn’t an example of it.

Trying to insert logic and facts in the mouth of Jim Cramer is as unwelcome as trying to insert logic and facts about the mouth of Jim Cramer.

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Seriously, I was exposed to the clip on The Daily Show (fantastically funny last night, and Colbert was good as well), and took it for granted that he was talking about Bear stock.  I’ll have to review when I get home.

My basic point about individual forecasters keeping their individual mouths shut still stands.

I have to disagree with the idea of individual forecasters keeping their mouths shut.  How else do we aggregate the data if individuals don’t talk?  Do you want these forecasters to sit down with a group of people and come to a consensus before they speak?  I’d rather listen to ten forecasters, see where they stand, and then make up my own mind.  So I’m not sure what’s your point.  We shouldn’t listen to someone because the aggregate market is telling us all we need to know?  We shouldn’t read season previews because the Vegas odds are telling us how the season will play out?

The individual forecasters don’t speak as though they subscribe to the Smooth Jimmy Apollo being right only 52% of the time. 

An honest forecaster will look at both sides, present both sides, and then can give his outlook, which makes it abundantly clear that they don’t expect anyone to bet on their forecasts with anything more than what’s in your pocket.

The typical forecaster will yap like a Jim Cramer, with such certainty as to belie a 52% success rate, and yet they themselves would never bet even a dollar on their own forecasts.

It makes for a boring article to say that Santana has a 30% chance of exceeding 210 innings and equally likely to not reach 170 innings, that his mean ERA forecast is 3.20, give or take 0.50 runs, 50% of the time, and so on.  In that event, if a forecasting article will become that boring, then don’t make any forecast at all.

Your voice should be heard as just another voice in a stream of “experts”, given no more weight, and no more airplay.

Basically, a typical forecaster should simply check a box at the voting booth, shut up, and move on.

Unless he wants to be honest about it, like I proposed above.  Just once, I’d love for a forecaster to simply say: “How the h-ll should I know, Connie?”

But Cramer isn’t a forecaster, he’s an entertainer.

It’s really obvious with him since he has the loud noises and stuff, but sadly even ESPN “analysts” these days are really just entertainers at this point.  If you want to see or hear something other than what will get the most eyes and ears tuned in, blogs and niche sites are your only choice.  So thank goodness we live in a time when those are available.

I have no love for Cramer, but cannatar is 100% right on this one. Cramer wasn’t talking about the stock.

Noting that I didn’t intend to make this blog about Cramer, but just forecasting in baseball, Cramer positions himself as a forecaster, since his ads (at one point anyway) had him say “I’m all about making you money”. 

I don’t see how that could be entertainment.  How would he say it if he wanted to position himself as a forecaster then?  “I’m all about making you money, plus or minus 20%, 95% of the time”?

Not to mention that he is founder of TheStreet.com, which certainly isn’t sold as a business-centric version of E! Online.

The stock market is not perfectly competitive. It is possible for individuals to know more than others without insider information. How else can you explain certain Hedge Funds consistently outperforming the market, year after year, by a lot?

Random variation?  Cherry-picking?

And while certain individuals may know more, how are we able to discern those individuals? 

Whenever you look at an analysis that evaluate the stock newsletters, you end up with forecasters who exceed in bull markets and tank in bear markets.  Essentially, the pick more extreme stocks, which makes them look good in good markets, and bad in bad markets.  As long as the good markets exceed the bad markets, they end up with a plus.

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In another thread, I noted a newsletter that tracks the yappers here:
http://www.insidethebook.com/ee/index.php/site/comments/forecasting_stocks/

Only one guy stood out from the rest, Ken Fisher of Forbes.  I was so very interested, and I remember reading several months ago that Ken was pumping up a bank stock that had limited exposure to the mortgage fiasco that would unfold: Countrywide.

Was that just cherry-picking on my part?  I don’t know.  But since I posted that thread a year ago, you can see how well he did here:
http://www.cxoadvisory.com/gurus/Fisher/
(Look for the red plus and minus signs at the end of each row.)

Basically, he’s a minus all year, as he’s been very bullish throughout the last year.  I mean, eventually, he’s going to be right!  And, he’ll be right there leading the charge saying “I told you so!”.

So, excuse me if I am unimpressed with the best of the best.

To post #8 about hedge funds:  A hedge fund that gains, say, 20% a year for a few years then loses 100% in one year is not a good deal.  Ask an Amaranth or Caryle Capital investor.

(Click name.)

We hear about successful funds.  We don’t hear about the failures.  The leverage that amplifies profits will also amplify losses.

The question whether Cramer was talking about Bear stock or Bear as a place to keep funds is a good one - it does seem like he may have been advising an investor who uses Bear, not a stockholder.

It seems reasonable that Cramer was referring to an account at Bear. Also, there’s a related story to follow:
http://www.bloomberg.com/apps/news?pid=20601110&sid=a5sFN6FELhZw

He can say whatever he wants, but as long as his paycheck is based on ratings and not accuracy, he’s an entertainer.

Bobby, I agree and disagree with you.  I don’t think the market is perfectly competitive (or perfectly efficient, or whatever the econ term is).  But at the same time… are there really funds that beat it every year?  Like 10 years running?

The studies I’ve seen usually say that about 70% beat the average, and 30% lose to it.  So after 5 years, 17% of funds (.70^5) could beat the average every single year, but still have a true talent level of only 70%.

Mike, please point me in the direction of any studies that indicate that more than 50% of all funds beat an “average” (DOW, S&P, whatever).  I was under the impression that the aggregate of all funds do worse than the market (after commisions and expenses of course), which would suggest that there is virtually no “skill” in picking stocks.  IOW, that around 50% of all funds beat the average and 50% do not.

Has anyone done a simple study looking at fund performance, as we would look at clutch hitting, etc. (observed variance versus expected variance), to see if there is any suggestion that fund managers do better than picking stocks at random?  It might be hard unless we know which individual stocks are being invested in by each fund, since we won’t know the “overlap” (which would affect the expecte4d variance by chance, I would think) otherwise.

I suspect that stock forecasting is like clutch hitting.  There probably exists either a small skill among a few people (~1% of all “stock pitchers") or a larger skill among a VERY SMALL percentage of people (~.1%), but overall it is for all practical purposes almost non-existent.

In any case, stock forecasting, fund management, etc, are clearly “phony professions,” like (most) sports handicapping, and mainstream sports analysis.

MGL

I think it is highly plausible that individual funds beats their comparison index (DOW or whatever) in indvividual years more than 50% of the time. This in no way means that they neccesarily have a positive expected value or that the “field” as a whole can outperform the index.

Simply put, the 30% of funds that are under the index combine to lose more money (compared to the index) than what the 70% that are over the index gain. It is not that difficult to be somewhat right a fair portion of the time, the big risk is that you are sometimes DEAD wrong.

To me a good model of the activity that these types of funds and advisors are doing is the following simple gambling game. Roll a single normal sixsided die, if it comes up 2,3,4,5 or 6 you win one dollar, if it comes up a 1 you lose ten dollars.

I did some quick research in the internet and came up with a few tidbits.

In a British study on “equity funds” (on the British market) they used some kind of boot strapping methodology to compare expected results with actual results, much like we do in baseball (to determine skill composition), but seemingingly much more complex.

They concluded that there was evidence of skill both at the high and low ends, I think.  IOW, some funds are skillful (more than chance) at picking stocks and others are actually worse than average, skill-wise.

I have no idea how that translates in terms of “how much” skill and what that represents in terms of % return per year. IOW, if I take the best performing fund for the last 10 years (and assuming that their skill at picking stocks has not changed), I want to know how much “extra” in skill (above picking stocks at random) I am getting.  If it is not at least as much as the expense of the fund, I won’t want to invest in it.

There was also a much-cited study by Baker, et al, which looked at buys and sells within ("holdings weight") a fund and what each stock’s next earnings announcement looked like.  They found that on average, stocks that were sold in a fund had a much lower earnings announcement than stocks that were bought.  I don’t know how they controlled for the fact that that could be the case for everyone.  Bottom line is that you have to look at returns if you want to analyze stock picking skill.

The motley-fool says that on the average all funds do 2% worse (per year) than the market itself.  That is bad. That includes fees I assume.  I don’t know what the average fee is in all funds.  Maybe 3%, maybe 5%.  I don’t know. If it is 5% and they only do 2% worse, that is not too bad actually.  That is like only doing -10% at the race track.  You’ll go broke quickly, but you are slaughtering the market (the average vig. at the track is like 20%).

The motley fool also does not say for how many years that number (2% worse than average) is based, what data, etc.  In general, “the fool” throws out a lot of numbers without backing them up with citations, which I don’t particularly like.

They also say that the load funds do no better than the no-load funds.  That is before you account for the differences in fees, I think.  If that is true (which I have no reason to think that it is not), then a load fund (of which there are many) is a complete rip-off and should be illegal (seriously).

Now, if it is true that there is in fact a “skill” at picking stocks as some of these studies seems to suggest, and it is also true that all funds combined do 2% worse than the market average, that means that several things could be taking place:

One, it is a small skill or few fund managers have it, such that overall they barely do better than the market, but the expenses eat up the average skill plus another 2%.

Two, there are some manages who have a large positive skill and others who have a large negative skill.  I am not sure that it is possible to have a really large negative skill (doing worse than the market average before expenses in true talent).  Therefore, I would have to think that #1 above is much more likely.  That there is a very small skill in picking stocks, like clutch hitting, platoon ratio for RHB, and pitcher BABIP (among others), and that this skill even if identified, cannot really beat the average market after considering expenses.

Of course, the only thing that matters is, if there is a skill, what is the regression?  IOW, if the market average is 10% per year, and fund A does 15% over the last 10 years, how much true talent does that represent?  If it is less than 2% or so above average, then it is worthless, as even a no-load fund is in that 1-2% expense ratio, I think.

It is also possible that we can do better than just using a straight regression to convert sample performance into an estimate of true talent (a fund projection) by “scouting,” as in sports.  By that, I mean listening to and researching an individual fund and fund manager philosophy, like a Warren Buffet.

Interesting stuff.  As Tango says, much like sports analysis and forecasting.

Someone sent me an offlist note about how to explain the well-off gamblers around.  I explain it much like the well-off brokers.  There’s (at least) four ways that someone involved in gambling/stocks can make money:
1. arbitrage (look for inefficiencies in the market)
2. agent (commissions and fees)
3. owner/consultant (sell your services as a money manager / oddsmaker / exploiter)
4. forecaster

My guess is that forecasting is almost certainly blind luck.  Or, at the very least, not giving in to your emotions.

Well, the old adage is that if these guys really knew anything they’d be playing the market, not talking about it.

Buffet doesn’t say anything, but his moves are closely monitored and are far more influential to real traders than some fat head you yells into a camera.

#17, for gambling (sports betting), #4 and #1 are related, but they are also separate and distinct strategies, although most sports bettors do both.

There are plenty of sports betters who can beat the average by betting on a select few games which are improperly “lined.” That falls into the category of forecasting.  The “arbitrage” category is more like betting “middles” or finding games that are improperly lined by one (or more) sportsbooks as compared to the average or prevailing line at all the rest.  Or even being skillful at predicting which way the line is going to move, because of betting patterns.

As opposed to the hundreds of even thousands of sports betting “touts” who are simply scam-artists (some know they are, and others don’t), there are plenty of sports handicappers/bettors who can “beat” the oddsmaker, again, in a small percentage of games (if they were forced to bet all games, they would get killed).  The pertinent issue is by how much, because, as with the stock market, the cost of doing business (the vig and other expenses).  I am talking about true talent of course.  In most sports, the vigorish is around 4.8% (1/21), which means that you have to win (again, in true talent) around 52 and change percent of your “even money” bets.  (In baseball sides, the vig is around half of that at the best sportsbooks, depending upon the odds of the individual game - the vig is not fixed as it is in most sports).

The average legitimate handicapper can probably just about make up for the vigorishm using his skill (although it depends on the sport - e.g. NFL is much easier to beat because there is not as much “wisdom of the crowd” in that sport).  As far as the skill of the best handicappers, no one knows for sure.  Some knowledegable people say that virtually no one has the skill to beat the vig by more than a couple of percent and others will disagree.

My (educated) guess is that it is A LOT harder to get a significant edge by forecasting stocks than it is in sports.  The stock market is MUCH more efficient and there is MUCH more wisdom of the crowd.

As someone who has dabbled in stocks for several decades now, I believe you certainly can beat the market on an individual basis.  That is, if you can wait for the good values to come along, stay out of the market when you don’t see any good values, etc., you can do quite well.  The market is efficient, but it’s not all-knowing.

The problem is for those who have to be invested in the market virtually all the time (ie. stock funds).  In those cases, only a few can beat the market consistently.  And I’m not really sure that I’d bet on those “few” going forward.

My favorite Buffet story is how he closed shop in the early ‘70’s.  He basically returned money to all his investors, announced that he couldn’t do any better and closed his doors.  Not long after, the market crashed and he was in business again.  Not many people would do that.