Pundits (Mostly RW) versus Quants (Nate Silver, et al) - Index Investing v Active Management

[TomCADem]

It is certainly interesting to hear the loud and vigorous attacks by political pundits on the numerous projections and models concluding that President Obama is favored to be re-elected. Indeed, it often seems that the primary arguments against the quants is that there models do not fit into the defined Fox News narrative that President Obama is losing and that Mitt Romney has momentum. Perhaps even more important, the pundits do not want to admit that their opinions are largely worthless or, worse, are not different than the con artists who try to pump a stock before dumping it.

Indeed, the debate seems reminicent of the debates a few decades ago in the investing realm between active management along with paid brokers versus simple and cheap indexing funds. The financial industry dismissed proponents of indexing insisting that investors needed expert advice to be able to succeed. Yet, the record showed that most managers could not match the market average that indexing represented.

So, the debate continues in the realm of politics where partisan pundits wage war upon the statistics and math. I am sure that one day Democrats and liberals will rail against such figures. Nonetheless, given the over-representation of Republicans and right wing pundits in the media, I like the fact that we have staticians whose models and data sources we can generally evaluate, rather than relying on the gut instincts of pundits who are pushing an agenda, rather than informing us on the true state of the race.

http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/10/30/the-nate-silver-backlash/

Before we get too deep in the weeds here, it’s worth being clear about exactly what Silver’s model — and that’s all it is, a model — is showing. As of this writing, Silver thinks Obama has a 75 percent chance of winning the election. That might seem a bit high, but note that the BetFair markets give him a 67.8 percent chance, the InTrade markets give him a 61.7 percent chance and the Iowa Electronic Markets give him a 61.8 percent chance. And we know from past research that political betting markets are biased toward believing elections are more volatile in their final weeks than they actually are. So Silver’s estimate doesn’t sound so off.

Moreover, Silver’s model is currently estimating that Obama will win 295 electoral votes. That’s eight fewer than predicted by Sam Wang’s state polling meta-analysis and 37 fewer than Drew Linzer’s Votamatic.

So before we deal with anything Silver has specifically said, it’s worth taking in the surrounding landscape: Every major political betting market and every major forecasting tool is predicting an Obama victory right now, and for the same reason: Obama remains ahead in enough states that, unless the polls are systematically wrong, or they undergo a change unlike any we’ve yet seen in the race, Obama will win the election.

http://www.forbes.com/sites/rickferri/2012/08/20/index-fund-portfolios-reign-superior/

Mutual fund portfolios that hold only index funds have a far greater chance for higher returns than those holding actively-managed funds. The evidence in favor of all index funds, all of the time, is irrefutable, overwhelming and important to all investors.

Most articles on index fund investing compare funds in a single asset class, such as comparing broad U.S. equity funds to the S&P 500. These studies are important, but they don’t capture the multiplier effect that is gained by investing in several index funds across multiple asset classes. The odds favoring all index fund portfolios are significantly higher than an individual index fund in any single fund category.