The is part of the investor manifesto series.
How do we interpret this new dance that conveys new information?
Think about the bees? Analogy in that high, high up isn’t reality. So the bee had to try though. How do we interpret? We need congruence? Bee dance isn’t congruent with what we know. Taking data and rationalizing a story … some stories just don’t make sense. Some stories ultimately will. Sometimes we misjudge and sometimes we don’t.
Finance data has some waggle dance to it. Find a bunch of data and then try to explain it. Is value a risk factor based on fundamentals?
Is it a reward for taking on greater risk? Sure there’s been a premium but why?
Do we as investors have a model to think about portfolio performance and evaluating funds. Do we have an opinion on skill vs luck or active vs passive management.
We tend to believe there’s a gap between passive investors and active investors/business. Statistics and performance measurement has convoluted the story.
Today we are looking at a main theme in evaluating investment manager’s performance from the perspective of persistence.
And in particular what is the common thinking of this and is there a better model?
We won’t tackle it all but start with Jensen 1968 and Malkiel 1995 and Mauboussin.
Momentum is short-term persistence.
The idea is if there is skill thus rewarding active management then it should be persistent.
however that’s not been the case in the data.
The conclusion being it’s random and can’t pick future winners based on past performance.
Then to try and explain why investors still try … not a clean model. Requires behavioral or asymmetric info or ?
To reduce alpha … factors. Even Buffett’s Alpha.
Morningstar in 2006 ultimately stated … mix of multiple things to evaluate.
The next article will be to discuss Berk’s model