Saul, you can't possibly exist!

I was rather amused by John Mauldin’s latest Thoughts from the Frontline where he explains why so much money is leaving active funds for passive funds. Samples:

The inability of so many active funds to find that “edge” that formerly allowed them to produce alpha is quite remarkable. I have written about this phenomenon before, so I won’t go into detail here; but it is the massive move from active to passive funds that is the core of the problem. Passive investing simply allocates among a number of index funds that indiscriminately buy or sell the stocks that are in their indexes.

and this one:

Here’s the problem: It is extremely difficult for an active manager to buy the best companies and/or short the worst companies and show much outperformance relative to the passive index funds. No matter how much research you do, no matter how well you know those companies, your research is not giving you an edge over the massive movement to passive investing.…

So, you see, you could not possibly have outperformed!


Denny Schlesinger


Would Mauldin’s be saying that if his performance was much better?


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Mauldin is a joke and a terrible fund manager but the issue of active v passive is becoming more pertinent over time.

I still come down on the side of active for the few who are extremely talented, but using the passive QQQ ETF [Nasdaq 100] one would have made 11.8% CAGR over 10 years or 204% return. 15 years at 14.4% CAGR, 5 years at 18.5% CAGR.

For no time or energy expended, super-low fees, almost no turnover, tax-efficiency, and no trading costs, that’s a helluva return to participate in the best and fastest growing tech and biotech firms.


Ok - here’s an interesting video challenging the received wisdom of passive index fund investing using the same data and challenging investors to go the Saul like route……



Chart Alert!

One of the ways people get misled is by showing them the wrong kind of chart. One thing we can all agree to is that the stock market rises over time, by fits and starts if you will, but it grows in the long run. If you show growth over a long time in a linear chart you will always show a hockey stick curve, just like Sven Carlin’s does:

In a semi-log chart a doubling from 1 to 2 has the same vertical displacement as a doubling from 100 to 200 everywhere on the chart. Not so on the linear chart where a doubling at the left side is hardly noticeable while on the right is HUGE! A doubling from 100 to 200 is 100 times bigger than a doubling from 1 to 2 yet it’s the same growth rate, 100%.

At one point Carlin says that most of the stock market growth happened in the last 35 years and that is what a linear chart shows but that is misleading. With growth what you are interest in the rate of growth. From 1 to 2 in a year is exactly the same as from one million to two million in one year, 100% in both cases. To show this accurately you have to use a semi-log chart. Please take a look at the 110 year DJIA chart. The top chart is semi-log showing an average growth rate of 4.7% (using the best fit curve method, not start to end which is 5.1%). Never in recent times has there been a crash like the 1929 one. But if you look at the linear chart below, the 1929 crash seems to be just noise.

Beware of anyone presenting long term growth data with linear charts! They are either ignorant of log-charts or have an axe to grind (peak oil, climate change, index funds). Up to five, maybe ten years you don’t get much distortion from linear charts but beyond that insist on semi-log charts*.

Results of Saul style investing

Saul is outperforming and has for a long time. We can assume or accept that he has something on the investing ball that most investors don’t have. What would happen is everyone were a Saul? The answer might shock you. One in four Sauls would outperform the market and the other three Sauls would underperform! The cause has nothing to do with Saul or his method, it has to do with the natural or systemic distribution of wealth which happens to be of the same type as the distribution of earthquakes. It’s not the normal or bell curve distribution that most of us assume but a power law distribution, the 20-80 rule which could be the 25-75 or the 15-85 rule depending on the power of the particular set.

Saul style can only be ‘guaranteed’ successful if most investors are doing something else. ‘Guaranteed’ in quotes because there are no guarantees in the market.

Selling Index Investing

I’ve never heard it put this way but an index investor will beat three out of four investors by matching the market. In other words, active investors have a 75% probability of underperforming the market due to the market’s power law distribution.

Denny Schlesinger

  • Semi-log because only the Y axis is logarithmic, the X axis is linear.

Pareto Principle

I don’t think there is much chance of too many people embracing the “Saul Method” For one thing it is hard to define in detail. Other methods even are obscure like on the NPI board , but both tend to pick many of the same stocks.

Lots of techniques work for a while. Until they don’t.

As humans we are not like the Harvard endowment , we live only so long. Thus most of us have to be somewhat shorter term oriented.

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I don’t think there is much chance of too many people embracing the “Saul Method”

I never said or even hinted that they might. My point was to illustrate an aspect of markets that is mostly ignored. For example, people point out how useless mutual funds are since 75% underperform the market. It has little to do with the funds’ prowess and a lot to do with the Pareto Principle, the power law distribution of wealth. Were Saul’s methods widely adopted (not that it will happen), the distribution of performance of ‘Saulites’ would mirror the distribution of performance of mutual funds, 1/4 outperforming and 3/4 under performing or some similar distribution.

BTW, a huge fund can never be as nimble as Saul as large trades move markets and give away trading patterns.

Denny Schlesinger


BTW, a huge fund can never be as nimble as Saul as large trades move markets and give away trading patterns.

Hence the appeal of large-cap index funds.

In addition to your entirely correct power law comments.

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