The Art of Seeking Beta: Where Average Investors Beat the Profs
Nasdaq 100 Index (
NDX
), S&P Midcap (
MID
)
Since Jack Bogle created the first stock index fund in 1974, he has shown that passive investing in low-cost index mutual funds could beat active fund managers after cost.
These days, there are countless of stock indexes and thousands of index funds to choose from. Picking the right market index, which I term “Seeking Beta”, is quite challenging.
An average investor without stock-picking skill could still achieve impressive results. Which index he chooses would reflect his belief system and his overall assessment of the stock market. Investment returns could be vastly different.
I put together three hypothetical examples to illustrate the Art of Seeking Beta.
US investor Adam
• Had $10,000 in cash one year ago, and invested in a Nasdaq 100 index fund;
• Today his portfolio would have a market value of $11,574;
• One-year return is +15.74%, excluding transaction fees.
Chinese investor Bill
• Had 67,000 yuan in cash one year ago, and invested in a China SSE index fund;
• Today his portfolio would have a market value of 66,919 yuan;
• One-year return is -0.12%, excluding transaction fees.
Chinese investor Catherine
• Had 67,000 yuan in cash one year ago;
• She converted the fund into USD at an exchange rate of 6.70;
• She immediately invested the $10,000 proceed in a Nasdaq 100 index fund;
• Her portfolio would have a market value of $11,574 now;
• Today, she converts the USD back to yuan at an exchange rate of 7.10;
• Catherine now has 82,175 yuan;
• One-year return in yuan is +22.65%, excluding transaction fees.
For comparison, US hedge funds generated an average weighted return of 4.1% in the fourth quarter of 2022, up from -0.6% in the third quarter and -6.8% in the quarter before, according to Citco's data.
Adam could easily beat an average hedge fund. Catherine could rank among the Top-20 US hedge funds and the Top-5 Chinese hedge funds.
This case illustrates how non-professional investors could achieve impressive results with common sense decision making:
• One year ago, China’s economy was halted to a standstill amid strict Zero-Covid policy. It was not unreasonable for an investor to pick US over Chinese stock markets.
• The Fed started raising rates in March while China central bank cut rates; Interest rate parity dictates that Chinese Yuan would depreciate against the Dollar;
• For a retail investor, you only need to know that converting yuan deposit into dollar deposit would generate more interest income;
• Each Chinese citizen is allowed to exchange for $50,000 a year; A couple with $100,000 could do some serious investing in the US market.
• US stock market indexes seldom go down two years in a row; thus, after the Nasdaq experienced a 30% drawdown, investors could expect a rebound.
Implications in Today’s Market
You may say that looking back is 20/20 vision. But we can’t time travel back to repeat Catherine’s investing. What about looking ahead? Luckily, we are not blind-folded. Here is my observation:
The S&P 500 has risen 12.2% year-to-date. However, this growth is primarily due to the AI-fueled bubble by five mega-stocks:
NVDA
(+174%),
AAPL
(+47%),
AMZN
(+46%),
GOOG
(+42%),
MSFT
(+39%).
After taking out these top-5 trillion-dollar companies, the remaining “S&P 495” has a meager return of under 3% YTD. The S&P Mid-Cap Index, which is the S&P 500 minus the top-100 stocks, has a year-to-date return of 2.74%.
If a fund manager comes up with a new S&P 495 ETF, I would seriously look into it. Meanwhile, for the art of seeking beta, S&P Midcap is not a bad choice.
Happy Trading.
Disclaimers
*The opinion above is my own. This is not a trading advice.
NDX
), S&P Midcap (
MID
) Since Jack Bogle created the first stock index fund in 1974, he has shown that passive investing in low-cost index mutual funds could beat active fund managers after cost.
These days, there are countless of stock indexes and thousands of index funds to choose from. Picking the right market index, which I term “Seeking Beta”, is quite challenging.
An average investor without stock-picking skill could still achieve impressive results. Which index he chooses would reflect his belief system and his overall assessment of the stock market. Investment returns could be vastly different.
I put together three hypothetical examples to illustrate the Art of Seeking Beta.
US investor Adam
• Had $10,000 in cash one year ago, and invested in a Nasdaq 100 index fund;
• Today his portfolio would have a market value of $11,574;
• One-year return is +15.74%, excluding transaction fees.
Chinese investor Bill
• Had 67,000 yuan in cash one year ago, and invested in a China SSE index fund;
• Today his portfolio would have a market value of 66,919 yuan;
• One-year return is -0.12%, excluding transaction fees.
Chinese investor Catherine
• Had 67,000 yuan in cash one year ago;
• She converted the fund into USD at an exchange rate of 6.70;
• She immediately invested the $10,000 proceed in a Nasdaq 100 index fund;
• Her portfolio would have a market value of $11,574 now;
• Today, she converts the USD back to yuan at an exchange rate of 7.10;
• Catherine now has 82,175 yuan;
• One-year return in yuan is +22.65%, excluding transaction fees.
For comparison, US hedge funds generated an average weighted return of 4.1% in the fourth quarter of 2022, up from -0.6% in the third quarter and -6.8% in the quarter before, according to Citco's data.
Adam could easily beat an average hedge fund. Catherine could rank among the Top-20 US hedge funds and the Top-5 Chinese hedge funds.
This case illustrates how non-professional investors could achieve impressive results with common sense decision making:
• One year ago, China’s economy was halted to a standstill amid strict Zero-Covid policy. It was not unreasonable for an investor to pick US over Chinese stock markets.
• The Fed started raising rates in March while China central bank cut rates; Interest rate parity dictates that Chinese Yuan would depreciate against the Dollar;
• For a retail investor, you only need to know that converting yuan deposit into dollar deposit would generate more interest income;
• Each Chinese citizen is allowed to exchange for $50,000 a year; A couple with $100,000 could do some serious investing in the US market.
• US stock market indexes seldom go down two years in a row; thus, after the Nasdaq experienced a 30% drawdown, investors could expect a rebound.
Implications in Today’s Market
You may say that looking back is 20/20 vision. But we can’t time travel back to repeat Catherine’s investing. What about looking ahead? Luckily, we are not blind-folded. Here is my observation:
The S&P 500 has risen 12.2% year-to-date. However, this growth is primarily due to the AI-fueled bubble by five mega-stocks:
NVDA
(+174%),
AAPL
(+47%),
AMZN
(+46%),
GOOG
(+42%),
MSFT
(+39%). After taking out these top-5 trillion-dollar companies, the remaining “S&P 495” has a meager return of under 3% YTD. The S&P Mid-Cap Index, which is the S&P 500 minus the top-100 stocks, has a year-to-date return of 2.74%.
If a fund manager comes up with a new S&P 495 ETF, I would seriously look into it. Meanwhile, for the art of seeking beta, S&P Midcap is not a bad choice.
Happy Trading.
Disclaimers
*The opinion above is my own. This is not a trading advice.
