Cluster Family Office Blog

Our friend and prolific blogger JMDV has published Tuesday y Wednesday two summaries of the Bestinver Annual Conference. That is something that those of us who were unable to attend the conference are very grateful for, because Paramés It has, by its own merits, earned its place as a benchmark from which to learn, albeit always with a critical eye. Given the timing—coinciding with the Conference and JMDV’s summaries—this may not be the most opportune moment to publish this article, which, incidentally, had already been sitting in the «Drafts» folder since last Saturday. Or perhaps it is. In any case, here it is, just as I wrote it last weekend:

Thank you Fernan2 for always exercising good judgement in choosing the Spotted here and there 😉 Well then, through one of your links, I’ve come to this a brilliant article by Julio Cuesta (quant_Notes). I must admit, to my shame, that I hadn’t read it before.

To put it very briefly, Julio Cuesta (quant_Notes) is conducting an experiment Monte Carlo to put the successes of the best investment fund managers into perspective. In it, he demonstrates that, statistically speaking, given a sufficiently large sample, there will always be some fund managers who, purely by chance, will outperform the expected benchmark for a limited period. This is not down to any merit on the part of the managers, but purely to statistical chance. I recommend you take a look at it before we continue with our analysis.

That said, let’s start nitpicking about this experiment or at least put a few thoughts out there:

Let’s extrapolate this simulation – in which pure chance outperforms the market, given the large number of failed funds and fund managers – to other scenarios outside the stock market. For example, the probability of being happy with your partner for the rest of your life. Following the approach of the quant_Notes simulation, one might think we should consider the history of all couples as variables, rather than just those who have not divorced or separated. Only then would we have a clear idea of what, statistically speaking, lies ahead for a young person who is about to start sharing their life with another person. Following the same line of reasoning, an investor who, by contrast, places greater trust in one fund manager over another, would be the one inclined to think that a couple who have enjoyed many years of a happy life together must be doing something better than others who fell by the wayside.

It is hard to imagine that someone who has been through 5, 7 or 12 divorces or separations is just as likely to be happy with their partner until death do them part, and that they have simply been less fortunate than their friend, the perpetual monogamist. It is implausible that the only difference between couples who change partners as easily as they change their underwear and those who are stable in the long term is mere chance. I find it hard to believe that they are part of the so-called survival bias. The same could be said of someone who changes jobs or stays in the same one until retirement. We could find countless other examples that could be extrapolated in the same way. Is it merely chance, or are it different personal profiles and idiosyncrasies that determine the future trajectory of a relationship or a job? Similarly, is it merely chance, or are it different management approaches that determine the success or failure of an investment fund?

I am not saying that I do not partly agree with the conclusions of this experiment, but I refuse to believe that human ability is incapable of beating the market, any more than chance itself can. However, the strategies of successful fund managers can easily become obsolete and useless in the face of the rapid evolution and drastic changes our global economic landscape is undergoing. And that places greater responsibility on chance for the performance of successful funds – past, present and future.

The curious thing – and it is true – is that, given the vast number of fund managers and funds that are constantly being created and disappearing, the historical data that should enable us to separate the wheat from the chaff is simply too short. In other words, we should compare the results, taking into account this survival bias, against a t=100 or 1000 – that is, 100 or 1000 years of historical performance data – to be more certain that there is more to it than survival bias o survivorship bias in their successes. Five, ten or twenty years are, mathematically speaking, insufficient time horizons given the vast number of fund managers out there. The failure of the successful ones may simply be a matter of time, if their results are truly the product of chance. But even so, given that our lives as investors are finite and limited to a few decades at best, we need only happen to come across the «t» successful managers during that time. It should matter little to us whether time attributes success to good management or to chance, for as far as those of us who were fortunate enough to witness their «t’s of success are concerned, they were the best managers. Furthermore, investment environments are so volatile that supposedly successful management strategies will cease to be so over a time horizon extending beyond a few decades. Therefore, in reality, we will never know whether past success was down to management or mere chance.

We could say that markets have a component stochastic which we cannot ignore, but from which we must learn as much as possible determinism of some managers.

So, is it part of Paramés an elite group of fund managers whose strategy is capable of consistently outperforming the markets? Or, on the contrary, is it part of the survival bias, along with the rest of the global ranking of the best stock market fund managers? In my opinion, it is a genuine crack as a fund manager, even though his job requires him to rotate his portfolios, perhaps more frequently than he would personally prefer. But we must thank Nassim Nicholas Taleb that opens our eyes with its «Fooled by Randomness» and with «The Black Swan«. The first book, to put into perspective the historical success stories we are so fond of; and the second as an exercise in humility in the face of what the stock markets have in store for us from today onwards. Two works that will undoubtedly lead us – fund managers and the markets alike – to view one another in a new light.”.