From: John Conover <john@email.johncon.com>
Subject: Re: Optimal Stock Market Strategy Re: SGP versus Switching Campaigns; wisest strategy
Date: 4 May 1999 07:55:37 -0000
dave955@my-dejanews.com writes:
> In article <7gkugm$d6t$1@dartvax.dartmouth.edu>,
> Archimedes.Plutonium@dartmouth.edu (Archimedes Plutonium) wrote:
> > The more companies you pick for your portfolio is an open admission
> > that you simply do not know what you are doing, with any degree of
> > confidence and expertise. The fewer stocks, such as 2, indicates a
> > large expertise and confidence in your skills. The poorest money
> > managers are the ones with large diverse portfolios.
>
> No, actually, the poorest portfolio managers as measured by actual return
> are going to be the people who put all their money into a few stocks that
> underperform the market. The best portfolio managers as measured by actual
> return will be those who put all their money into a few stocks that
> outperform the market. The relevant question is whether on average the
> portfolio managers who put money into a few stocks outperform those who
> put it into many stocks or mutual funds.
>
Hi Dave. Your points concerning tax advantages of capital gains, (ie.,
equity value growth,) vs. dividends are well taken, (there are
dividend reinvestment scenarios-but I am not familiar with the tax
regulations.)
The fund managers that have done the best in the long run, (long run
meaning operated a fund that was in the top 10 in the US for no less
than 9 years,) seem to run about 15-25 stocks. In a bull market, it
will drop down as low as 10, and in a bear market, I have seen as high
as 50. But on average, it is about 12. Most will pick about 3 stocks
with relatively high kurtosis, (Hurst coefficients of about 0.6,) and
balance them off against 3 or 4 blue chips. They spend a lot of time
balancing the fraction of the portfolio that is invested in each
stock.
One that buys fewer stocks is Warren Buffet. Peter Lynch buys into
more. Buffet prides his self in being a "stock picker" and Lynch tends
to have a lot of "quants" on his staff. Both have done well with
differing portfolio philosophies.
If the EMH were "true", then Lynch should have done better than
Buffet. But in reality, about half the stocks on the US exchanges have
Hurst coefficients greater than 0.5, (ie., high kurtosis,) and half
near 0.5, (the EMH presumes exactly 0.5,) which would account for why
both have a long history of doing well-at least much better than the
other 6,000 fund managers in the US, (although many fund managers have
done significantly better than Buffet and Lynch in the short run, of
less than 5 years.)
John
--
John Conover, john@email.johncon.com, http://www.johncon.com/