[HN Gopher] "Buy and Hold" No More: The Resurgence of Active Tra...
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"Buy and Hold" No More: The Resurgence of Active Trading
Author : cristiandima
Score : 72 points
Date : 2021-04-10 18:54 UTC (4 hours ago)
(HTM) web link (a16z.com)
(TXT) w3m dump (a16z.com)
| hehaheha wrote:
| It's not resurgence of active trading. It's a new brand of highly
| levered trading. We've never seen anything like it before. This
| was highlighted at institution level with Softbank last year and
| recently with Bill Hwang and Archegos debacle. And you see retail
| trading weekly options in high volume. Is it gambling? When was
| investment not gambling? It was always "informed" gambling with
| positive expected avg return.
|
| What's the economic impact of this behavior though? I want to say
| it's generally negative since it's bound to grossly disrupt
| proper price discovery but was that even the case before this
| period of excess leverage? I doubt it.
| [deleted]
| bromquinn wrote:
| I kind of hate the idea of encouraging young people to pursue
| speculation instead of building. Post-IPO investing doesn't
| create a ton of value for society.
| hehaheha wrote:
| I know what you mean but this notion of buy and holding index
| was perhaps a mirage. It's all theoretical and cynical side of
| me thinks it was "invented" as a way to appropriate pension and
| retirement funds into Wall Street machination.
| hogFeast wrote:
| How do you think VCs are getting rich? IPOs and transactions
| are more profitable than building companies with sustainable
| business models (by definition, it is usually cheaper to buy a
| bad company, attempt to flip it in the capital cycle than buy a
| good company which is likely expensive/impossible to buy).
| CynicusRex wrote:
| Thinking out loud, but to me, any economic system is flawed if it
| rewards bankers, hedge funds, venture capitalists, and
| speculation more than carpenters, plumbers, or any other
| profession that requires actual real world skills. My gut tells
| me that finance should be automated by computers without a profit
| motive because greed rots the soul and our environment.
| gruez wrote:
| >Thinking out loud, but to me, any economic system is flawed if
| it rewards bankers, hedge funds, venture capitalists, and
| speculation more than carpenters, plumbers, or any other
| profession that requires actual real world skills
|
| "real world skills" is a nebulous concept. What counts as a
| "real world skill" and what doesn't?
|
| >My gut tells me that finance should be automated by computers
| without a profit motive because greed rots the soul and our
| environment.
|
| You mean some sort of planned economy? Those have not worked
| well historically. Even if you somehow outsource it to an
| unbiased computer, who sets the weights? What's the relative
| value of an apple compared to an banana?
| CynicusRex wrote:
| >"real world skills" is a nebulous concept. What counts as a
| "real world skill" and what doesn't?
|
| Got a sprain? Call a doctor. Leaking pipe? Call a plumber.
| Doesn't seem nebulous at all. Conversely, speculation and
| greed ruining the world? Call on the populace to bail them
| out. Speculation doesn't build or fix physical stuff.
|
| >You mean some sort of planned economy? Those have not worked
| well historically.
|
| Because historically it has been done on inferior computers.
| Whereas now we have the computing power to calculate the
| economy n-times over. Dr. Paul Cockshott on Cybersocialism:
| https://www.youtube.com/watch?v=LtlZys7QOO4. That being said,
| I'm sceptical as well; the video leaves many things
| unanswered which he expands on in his books that I have yet
| to read. However, I welcome any ideas on how to detach humans
| from having to deal with money, so we can collectively pursue
| more lofty goals, beyond profit.
| CarelessExpert wrote:
| > Conventional wisdom holds that passive trading is the rational
| investing strategy.
|
| That isn't conventional wisdom. It's not someone's opinion. It's
| statistically proven reality. Whether you're an individual trader
| or a billionaire hedge fund manager, active strategies lose out
| to passive ones in the long run.
|
| > has catalyzed a lean-in mindset around investing, particularly
| among Gen Z.
|
| And it will burn them, just like it burned penny stock traders in
| the 80s and Internet stock traders in the late 90s.
|
| The reality is Gen Z'ers are desperate at this point and they're
| turning to gambling in the hopes of making up lost economic
| ground. And if that happens en masse, it's not gonna be pretty.
| baq wrote:
| it used to be like this but now ETFs hold so much weight in the
| US market that you can easily front run additions/removals for
| relatively easy money.
| thrav wrote:
| While you're right about the majority, there are pockets of
| young people partaking in sophisticated strategies, and doing
| quite well. The people in the discord server that I belong to
| are all using stops to max their downside and get out quick if
| their instinct proves wrong. After several months on paternity
| leave, it became clear that greatest barriers to active trading
| are money and time, like most things. If you're treating the
| market like it's your job, day in and day out, you get a really
| good feel for the flows, and can move into positions that are
| turning north pretty easily. The fact that the Nasdaq was about
| to go on a tear was telegraphed for weeks.
|
| There are hundreds of opportunities to do this every day, so
| you just jump on the most painfully obvious ones, and avoid
| anything uncertain.
|
| If you have a real job, and can't watch the market all day,
| every day, you don't stand a chance. Without fail, the biggest
| losses in our group would come when someone tried to hop into a
| position while half watching the market, and then get sucked
| into their real work.
|
| Once you've got entry down, the hardest part is training
| yourself to exit at the right time.
| CarelessExpert wrote:
| > there are pockets of young people partaking in
| sophisticated strategies, and doing quite well.
|
| If we could I'd make a 20 year wager that every one of those
| people will fail to beat the market in the long run.
|
| It's very easy to make money on "sophisticated strategies"
| during an historic 10 year bull run.
| Ekaros wrote:
| I wouldn't go that far, there is always outliers. But I
| would also bet that on average they will do worse than the
| market.
| MattGaiser wrote:
| https://www.investopedia.com/articles/investing/030916/buff
| e...
| [deleted]
| thrav wrote:
| They're making money up and down. For example, SPY is
| likely done climbing for a while. Maybe it will squeeze up
| to ~4160, but it's either going to be flat or aggressively
| down in the coming days. Thursday/Friday was a very clear
| exit day. If it squeezes north and over extends further,
| it's a very clear short. If it sits flat for a week until
| OPEX, it'll be a clear buy for another leg up, then you
| reevaluate again.
|
| This is what I mean when I say treating it like it's your
| job. Go back and look at the big downturn last year. To
| anyone who was paying attention, it looked like a car crash
| in slow motion.
|
| Only to those of us with other work to do, did it look like
| a flash crash out of nowhere. The writing is very clearly
| on the wall for all of this stuff, because the big players
| needs days to reposition, and will be moving billions of
| shares, and you can literally watch them do it.
|
| The reason active funds don't do as well as the market is
| because they have to hedge. You're always paying a premium
| to minimize losses when you're hedging, and you can't exit
| fast when your position is worth billions.
|
| It's like turning a freighter, versus turning a speed boat.
| dionidium wrote:
| What's remarkable to me is that I know you think you're
| saying something useful and reasonable, but to me you
| sound _indistinguishable_ from an astrologist.
| Practically every word sounds more pseudoscientific than
| the one before it.
| yumraj wrote:
| > It's like turning a freighter, versus turning a speed
| boat.
|
| That is an apt analogy, which is why I believe Rentech's
| Medallion fund is kept small and has better returns than
| other larger funds.
| ac29 wrote:
| > clear exit, very clear short, clear buy
|
| You seem very sure about where the market is going in the
| short term, you should start a hedge fund!
|
| Or course, I'm kidding, internet financial hot takes are
| a dime a dozen, and generally worthless.
| Trasmatta wrote:
| > Only to those of us with other work to do, did it look
| like a flash crash out of nowhere.
|
| The market crashed last year because of COVID. Nobody saw
| that coming.
|
| Everyone has been predicting a major correction or
| recession every year for at least the past 6 years.
| Claiming that they predicted what was going to happen
| last year is pretty blatant confirmation bias.
|
| People predict a recession every year, and then when one
| finally hits, they say "see, I was right! Ignore all the
| years where it didn't happen!"
|
| There will be another correction in the future, we don't
| know when it will hit, and the same pattern will play out
| again.
| thrav wrote:
| No one saw it coming in January. Everyone saw it coming
| the week that it was starting, which is my point. It's
| really easy to tell when the big players start taking
| risk off.
|
| These people are also tracking senators and congress
| people's positional moves, as additional macro
| indicators.
| Trasmatta wrote:
| Did those same people see the subsequent bull run, that
| occurred much faster than most were predicting?
|
| There's a lot of people who think they're smart enough to
| time the market, but have just been lucky. In the long
| run, that catches up to most of them, which is one of the
| reasons passive investing wins out in the end, on average
| naturalauction wrote:
| Maybe I'm a bit of a skeptic but I've seen this sort of
| behavior repeat itself over and over again with crypto.
| Maybe the people in your Discord group are really smarter
| than almost everyone else, but at the end of the day the
| vast majority of day traders who think they are using
| sophisticated strategies are just gambling.
|
| I'm not saying it's impossible to make money - I just
| doubt you can intuitively get a sense for the "feel" of
| the market for something as largely traded as SPY. SPY
| traded 61 million shares yesterday (at $400 per). If the
| smartest institutional traders with the best tools can't
| figure out the direction of SPY in the short run with any
| kind of certainty, I don't see how an "average" person
| can. There is enough volume in the markets for
| institutions to turn around a pretty big freighter.
| thrav wrote:
| My point is that they can, to a degree. The bigger
| challenge for them is scaling in and out of the size of
| positions they need to be in to be profitable.
|
| If you're playing with thousands, you're playing a
| completely different game than someone playing with
| billions. You don't have to strategize about how to exit.
| You just exit.
| thrav wrote:
| My point is that they can, to a degree. The bigger
| challenge for them is scaling in and out of the size of
| positions they need to be in to be profitable.
|
| If you're playing with thousands, you're playing a
| completely different game than someone playing with
| billions. You don't have to strategize about how to exit.
| You just exit.
|
| Many hedge funds outsource the execution of their trades
| to HFT, which scales in and out over days.
|
| Google Archegos if you want to see what happens when you
| liquidate billion dollar positions in a hurry.
| ncallaway wrote:
| > While you're right about the majority, there are pockets of
| young people partaking in sophisticated strategies, and doing
| quite well
|
| Active trading will is more likely to have larger swings than
| passive trading.
|
| In the short-run the good times will be better and the bad-
| times will be worse.
|
| In the long-run, statistically the majority (not all!) that
| play the game will lose over the long run to passive
| investors.
|
| None of this is to argue for one of doing things over the
| other so long as people understand the risks that they're
| opting into.
| croutonwagon wrote:
| I see two issues there
|
| 1) confirmation bias. Many people have blind faith in the
| market and while trends are semi-reliable. There are plenty
| of instances that buck all trends and can take out even the
| most seasoned day traders accounts if the overrely.
|
| 2) a lot of times these are pump and dumb schemes, even by
| large hedge funds on small companies that are generally
| overvalued by the time the "opportunity" hits those reading
| the standard info sources.
|
| So as someone simply managing my own account. A solid
| strategy is to avoid day trade and only place buys on
| something you are good to be long on and have faith in. These
| are big ones like Microsoft or apple or Costco.
|
| I still invest in companies I'm very knowledgeable on but I
| don't take risks on nonsense. And worst case I'm long in some
| stock for a while But I don't have to monitor it to the
| minute nor do I have to really coughing up fees for managed
| funds at a massive scale.
|
| Sure I miss plenty of plays, especially intra-day or intra-
| week but I also don't lose anything on those.
| OutTeam wrote:
| Is this discord group open for everyone? If yes, would you
| mind sharing an invite link?
| genericone wrote:
| But passive investing is just that, passive, theres no market
| information, no price information that influences the shares
| and prices. How is passive investing sustainable? Doesn't this
| destroy finance in the long run? Prices being completely
| detached from a listed company's financial viability and
| business profitability... thats bad isnt it?
| [deleted]
| omgwtfbyobbq wrote:
| Why do you think prices are completely detached from a
| company's financial viability and business profitability?
|
| If I invested in a fund that's indexed to the S&P 500, and a
| company doesn't do well and drops out of the index, then the
| fund will sell that company and buy whatever replaces them.
|
| Ideally, sure, the fund could have known ahead of time and
| sold before the company dropped out of the S&P 500, but
| that's trying to time the market, which generally doesn't go
| well over longer periods of time. It wants to capture gains
| in the aggregate over long periods of time, not maximize
| gains. The more individuals and firms try to maximize gains,
| the more likely they are to get bit over the long term.
| duxup wrote:
| How many folks are out there as active traders? I'm not sure
| how big en masse really is here.
| [deleted]
| mucholove wrote:
| What it does do...for sure is make you go crazy.
|
| Traders are pretty wired.
|
| People building long term businesses (Like 10 year horizon
| plus) are on a different gravity.
| madrox wrote:
| If there's anything different about GenZ, it's that they're
| crowdsourcing their plays, making them behave more like a
| distributed mutual fund than a bunch of gamblers. Time will
| tell if that performs better.
| airstrike wrote:
| Or they're just getting played by finance "influencers" who
| buy into trades first and make most of the profits
| gruez wrote:
| spoiler: it won't. There's going to be outperformers, just
| like if you have 1000 people flipping coins, you're going to
| find a few with an uncanny ability to get consecutive
| tails/heads after several flips. That doesn't mean they're
| any good at it though.
| pastrami_panda wrote:
| This is true historically. But at certain times it's a complete
| no-brainer to enter the market or not. For instance consider
| post Covid at around March/April 2020. Stocks have dropped
| 20-30%. It took Moderna 2-3 days to develop a vaccine, is a 20%
| drop in e.g. Apple justified, or is it simply free money?
| baobabKoodaa wrote:
| > This is true historically.
|
| Nope, this is false. Please look up the historical
| performance of Renaissance Technologies Medallion Fund.
| ghaff wrote:
| Or were we on the verge of a complete global economic
| meltdown? I admit I transferred a fair bit into very safe
| investments at the time. As a result I didn't do as well as I
| could have (but well enough). But it was still a reasonable
| hedging strategy IMO.
| andi999 wrote:
| So Jane Street and James Simons do not exist?
| granshaw wrote:
| Jane Street is primarily a market maker I believe, not
| something an individual or even a small institution can just
| go out and do
| 4TunateSon wrote:
| Jane Street and RenTech are very different institutions
| compared to something like Vanguard or Fidelity. They aren't
| accessable to retail investors/traders, they have different
| goals, and methods.
| baobabKoodaa wrote:
| Nope, you're moving the goalposts now. The grandparent
| claimed that active investing is not a good choice for
| _anybody_. So a single example like RenTech is sufficient
| to disprove that claim.
| chronic2022 wrote:
| > The grandparent claimed that active investing is not a
| good choice for _anybody_. So a single example like
| RenTech is sufficient to disprove that claim.
|
| Correct.
|
| Too many passive index fund investors on this thread
| refuse to acknowledge that many hedge funds/proprietary
| trading firms consistently beat the S&P over 20-30+
| years.
|
| VTI and VOO are only 9% and 13% since inception in ~2001.
| Top quant firms like Citadel, Renaissance, Jane Street
| attain 20-40% annually after fees, over 20+ years.
|
| On average, hedge funds underperform. But a UHNW investor
| is not investing in average hedge funds. They're
| investing time-tested S&P-outperforming hedge funds.
| nceqs3 wrote:
| 1) Jane Street isn't that successful. 2) RenTech spends
| billions every year on compute, data and hiring the smartest
| people in the world.
|
| The average person could never compete with RenTech.
| centimeter wrote:
| > Jane Street isn't that successful.
|
| Their historical record is very good.
| baobabKoodaa wrote:
| > The average person could never compete with RenTech.
|
| Grandparent claimed that active investing is not good for
| _anybody_. A single example (like RenTech) is sufficient to
| disprove that claim. If you want to move the goalposts to
| "the average person", then it'll be an entirely different
| discussion.
| djoldman wrote:
| I think it's pretty obvious that the parent is talking about
| the average investor.
| baobabKoodaa wrote:
| > I think it's pretty obvious that the parent is talking
| about the average investor.
|
| Really? Because this is what the (grand)parent said:
|
| "Whether you're an individual trader or a billionaire hedge
| fund manager, active strategies lose out to passive ones in
| the long run."
|
| Clearly grandparent was not talking solely about the
| average investor.
| ghaff wrote:
| Yes but it's also a fair point that a lot of actively-
| managed mutual funds out there don't beat low-cost index
| funds.
| ghaff wrote:
| It probably depends how active and how sophisticated. (And
| how lucky.) Certainly there are large sophisticated
| endowments and investment funds that don't simply stick
| everything in an index fund and call it a day. And many do
| get better than S&P 500 returns. After all, you need to
| decide what investments to buy and hold and, presumably, make
| adjustments over time even if turnover is relatively low.
| wnevets wrote:
| There's always winners of the lottery but statically it wont
| be you.
| stewbrew wrote:
| Any statistical prove makes certain assumptions and as with
| every assumption, there are diverging views. In that particular
| case, the prove ignores any aspects that cannot be modelled and
| then be tested like, e.g., domain knowledge that gives you a
| headstart over other market participants. As always, I'd say
| the truth is somewhere in the middle.
| bezout wrote:
| I'm not arguing the opposite, but I'm very interested in
| learning more about this. Can you suggest some references?
| kgwgk wrote:
| The basic idea is that if you do better than the market -
| because you have more of the good stocks and less of the bad
| ones - there may be someone somewhere with the opposite
| positioning.
|
| In this simple model active investors in aggregate cannot do
| better than the index. Adding transaction costs, fees, etc.
| they'll do worse - as a group.
| maksimum wrote:
| A reference (that lays out the statistical arguments) is
| "Common Sense on Mutual Funds" by John Bogle.
| bitexploder wrote:
| It will just make buy and hold that much more beneficial.
| nicolas_t wrote:
| As someone who is doing buy and hold and not doing any day
| trading, how can I protect myself from the wild swings of the
| market caused by active traders gambling?
| baq wrote:
| you have to be aware of the macro environment: reflation,
| deflation, stagflation and growth all have different assets
| being better than others. currently we have reflation, so
| growth companies melt up, finance earns more due to rising
| rates, etc. once deflation comes you should be mostly
| positioned out of stocks, so you don't get blown up. 20%
| drawdown will get eventually compensated, but if you can
| avoid it, you've just added 20% to your base of compounding
| interest.
| mynameishere wrote:
| Well, those swings won't hurt you if you hold. That's the
| point. But if you were like a farmer and _had_ to sell at a
| certain point, the protection could be through derivatives.
| You might do the same with stocks if you were planning to
| sell at a given time in the future (eg, if you planned on
| buying a house in 2022).
| vinceguidry wrote:
| The wild swings only affect the meme stocks. Just stay away
| from those and you'll be fine. "The market" is a lot bigger
| than one group of gamblers can affect.
| ac29 wrote:
| Buy and hold investing is generally long term. If you are
| holding for 10+ years, the effects of active traders and day
| trading gamblers is basically just noise.
| zitterbewegung wrote:
| Dollar cost averaging[1] which is basically you buy any
| security every x amount of days. This is usually how a 401k
| is setup where you buy a mutual fund every time you get a
| paycheck.
|
| [1] https://en.wikipedia.org/wiki/Dollar_cost_averaging
| emerongi wrote:
| Worthwhile to read the full article, as well as the
| sources, and decide what is best for you.
|
| > The financial costs and benefits of DCA have also been
| examined in many studies using real market data, typically
| revealing that the strategy does not deliver on its
| promises and is not an ideal investment strategy.
|
| > Recent research has highlighted the behavioural economic
| aspects of DCA, which allows investors to make a trade-off
| between the regret caused by not making the most of a
| rising market and that caused by investing into a falling
| market, which are known to be asymmetric.
| nly wrote:
| It's not a 'strategy' really. Most regular Joe investors
| earn a salary every month, and keep spare money invested
| in the market. DCA isn't a choice in this case, it's the
| natural result.
| emerongi wrote:
| It is a strategy. If you sell your house and invest the
| proceeds into the stock market, DCA says you shouldn't
| just do one huge buy order, but you should spread your
| orders out over a longer timeline. It's two different
| strategies.
| Trasmatta wrote:
| 401k contributions aren't really DCA. It would fall more
| accurately under DCA if you were given the entire year's
| 401k contribution at once, and still chose to invest it
| periodically, rather than all at once.
|
| Or if you got a $10k bonus, and invested it over 6 months
| or something.
|
| FWIW, lump sum usually beats DCA in the long run.
| milesvp wrote:
| You may have missed something important, which is you
| should have some ideal portfolio balance in mind when
| purchasing. This forces you to "buy low and sell high" in
| that you buy whatever you need to to bring your percentages
| in line with you're ideal. This is the only strategy I've
| seen that provably beats the market (and it's been a while
| since I saw the paper talking about this, may be that it
| only beats the market in terms of total risk adjusted
| returns, and not total dollars returned).
|
| Edit: also it's important that you're asset portfolio has
| asset classes that tend to be out of phase, like stocks vs
| bonds.
| baobabKoodaa wrote:
| > That isn't conventional wisdom. It's not someone's opinion.
| It's statistically proven reality. Whether you're an individual
| trader or a billionaire hedge fund manager, active strategies
| lose out to passive ones in the long run.
|
| This claim is false. Some funds have overperformed year after
| year with high margins and (relatively) low risk, for decades.
| For example, Renaissance Technologies' Medallion Fund and
| Warren Buffett's Berkshire Hathaway. Please show me the
| "statistically proven reality" that explains these returns.
| scarmig wrote:
| 2020, Renaissance funds' performance:
|
| Closed to outsiders:
|
| Medallion, +76%
|
| Open to outsiders:
|
| RIEF, -23%
|
| RIDA, -34%
| baobabKoodaa wrote:
| > 2020, Renaissance funds' performance ...
|
| Since this is in reply to me, let me ask, what's the
| implication here? The tone of your post sounds like you
| disagree with me, but it's not clear what exactly you
| disagree with? Grandparent claimed that no-one can beat the
| market. I said that Renaissance Medallion Fund beats the
| market. Then you post a single-year performance of +76%,
| which is a really good performance for 2020. So... you
| agree with me?
| jjoonathan wrote:
| If I were investing someone else's money, I'd be happy to
| put a little in RIEF and RIDA in exchange for medallion
| shares.
| nceqs3 wrote:
| You forgot to mention that the external funds have
| performed exceedly well (20+%/year) over the past 15 years
| even after a 44% performance fee.
|
| Also the external funds are different strategies than
| Medallion.
| Spooky23 wrote:
| Many folks see Boglehead-ism as some sort of science. It's
| not bad advice for a disinterested investor in the US, but
| not exactly optimal advice either.
|
| I'd rather have my AAPL over the last 5 years than VTI+BND.
| maksimum wrote:
| What would you rather have for the next 5 years? Why?
| chronic2021 wrote:
| Citadel hedge fund. 19% annual return. After fees. For 30
| years [1].
|
| The most popular index funds (VTI, VGT) _only_ have a
| 20-year track record, with a paltry 9% and 13% annual
| return, respectively.
|
| [1] https://www.clearbrookglobal.com/citadel-millennium-
| d-e-shaw...
| dasil003 wrote:
| Huh? The first index fund was started 45 years ago, and
| indexes existed and are tracked far longer than that.
| Tell me what percentage of hedge funds beat the S&P over
| the last 50 years?
| chronic2021 wrote:
| If you cherry pick the US S&P (over international, and
| over small cap), I'm allowed to cherry pick hedge funds.
|
| Many funds consistently outperform the S&P by 2-3X over
| 30-40 years. Minimum investment, $5-10M, of course.
|
| Buy and hold is the best option for those under USD $10
| million net worth, but you must acknowledge there are
| semi-closed funds/prop trading firms that consistently
| beat the market.
| dasil003 wrote:
| Yes, just like there are individual stocks that beat the
| market. How do you pick them?
| atombender wrote:
| The Vanguard 500 Index Fund (VFINX) has existed since
| 1976.
|
| Kenneth French (the "French" in the Fama-French asset
| pricing model) provides market data going back to 1972
| [1] and can be used to reconstruct index fund
| performance.
|
| Citadel doesn't have individual clients, and if you're
| not a billionaire I don't see how you'd gain access to
| their hedge fund.
|
| [1] https://mba.tuck.dartmouth.edu/pages/faculty/ken.fren
| ch/data...
| ubercow13 wrote:
| Yes, generally picking a winning stock is a winning
| strategy.
| justicezyx wrote:
| You are using individual instances to disapprove statistical
| observation? Ate you seeing the contradiction here?
|
| ...
| [deleted]
| baobabKoodaa wrote:
| That makes no sense. The claim I'm disputing is of form "X
| is true for everyone". A single counter-example is
| sufficient to disprove a claim of this form. Grandparent
| claimed that everyone would be better off investing
| passively than actively. So a single counter-example of a
| genius like Simons is sufficient to disprove that claim.
| atombender wrote:
| Warren Buffett's investing performance can be explained by an
| intuitive understanding of known market factors (the French-
| Fama five-factor asset pricing model, etc.) [1].
|
| The Medallion fund is a whole other kettle of fish. Medallion
| uses extremely sophisticated models which took Jim Simons and
| his team of math wizards more than a decade to figure out,
| using vast amounts of historical data and computation. The
| fact that nobody else is replicating their performance should
| tell you just how difficult it is.
|
| In 2019, 71% of actively managed funds lagged behind their
| benchmark according to the S&P. In 2020, it was "just" 57%
| [2]. Meanwhile, 70% of active funds have been liquidated the
| last 20 years. There are of course years where actively
| managed funds are the winners, but over time, actively
| managed funds tend toward the mean, either lagging or
| matching the S&P 500.
|
| [1]
| https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3197185
|
| [2] https://www.spglobal.com/spdji/en/documents/spiva/spiva-
| us-y...
| throw0101a wrote:
| > _The Medallion fund is a whole other kettle of fish._
|
| It should be noted that while markets may be _mostly_
| efficient, I do not think anyone is claiming they are
| _completely_ efficient.
|
| If there are price discrepancies/anomalies, they could be
| exploited, at least some of the time. It could be that
| Medallion can find some and exploit them, say, 55% of the
| time. But over a large volume of transactions.
|
| Casinos make huge profits by exploit small house edges in
| volume:
|
| * https://wizardofodds.com/gambling/house-edge/
|
| There's a reason why Medallion has been closed for years:
| the (possible) market inefficiency exploits they're using
| may not scale.
| baobabKoodaa wrote:
| > It should be noted that while markets may be mostly
| efficient, I do not think anyone is claiming they are
| completely efficient.
|
| This is false. Grandparent is specifically claiming that
| markets are completely efficient. Here is a direct quote:
| "Whether you're an individual trader or a billionaire
| hedge fund manager, active strategies lose out to passive
| ones in the long run."
|
| In addition, many academics are also making this same
| ludicrous claim.
| baobabKoodaa wrote:
| > In 2019, 71% of actively managed funds lagged behind
| their benchmark according to the S&P.
|
| Yes, you have a market where participants trade against
| each other, and you discover that the average participant
| in the market does not "beat the market". That should be
| obvious. The question in dispute is whether _anyone_ can
| beat the market, and there's a mountain of evidence that
| certain people/funds beat the market year after year.
| djoldman wrote:
| 1. I think you'll find that funds that consistently beat the
| market for so many years are not taking investments. 2.
| Buffet himself says: "In my view, for most people, the best
| thing to do is to own the S&P 500 index fund"
| baobabKoodaa wrote:
| > 1. I think you'll find that funds that consistently beat
| the market for so many years are not taking investments.
|
| Yep, I agree.
|
| > 2. Buffet himself says: "In my view, for most people, the
| best thing to do is to own the S&P 500 index fund"
|
| Again, we are in agreement. I'm not sure what exactly it is
| that you feel you disagree with me about? Grandparent
| claimed that _nobody_ can beat the market, and I provided
| references to evidence that some people can beat the
| market.
| dasil003 wrote:
| Passive or active is not binary. Berkshire Hathaway's
| strategy _is_ passive by the WSB generations standards.
| baobabKoodaa wrote:
| Please stop trying to re-define words which already have an
| established definition. "Passive" and "active" investing
| are well defined concepts, and Berkshire Hathaway falls
| squarely in the "active" category.
| mancerayder wrote:
| I'm running counter-current here. I bought a vaccine maker last
| year, putting a quarter of my stock portfolio in it over time
| (several buys on dips). The vaccine maker was then approved,
| and is one of the biggest ones rolling out globally. This
| wasn't a one off, as I continued to follow the news and bought
| more blocks over several months. My portfolio is up a
| significant amount. On one year blocks, I'll start to sell
| since it'll be taxed as long-term capital gains. That's non
| retirement brokerage account. Now in my IRA, I buy and sell
| every few months on dips and peaks. It doesn't have to be
| perfectly timed, but it's going up. My portfolio is 70% cash
| and I've been beating the market the past 5 years.
|
| Other winners include tech companies and a space company.
|
| Someone explain to me why I'm an imbecile and why I should have
| been invested in Vanguard index funds, something I did for
| decades prior to thjs.
| CarelessExpert wrote:
| > Someone explain to me why I'm an imbecile and why I should
| have been invested in Vanguard index funds
|
| Simple: you got lucky in a bull market.
|
| Let's revisit how you're doing in the next recession or after
| a couple bad bets.
|
| If you want a deeper answer you'll have to do your own
| digging, as it's a big topic. But it's worth starting with
| the efficient markets hypothesis and reading some of the work
| of Jack Bogle.
| mancerayder wrote:
| Why would I have the same strategy during a bear market?
| How do index funds fare during a bear market? Might the 70
| pct cash I have be used for non equity investments, like
| real estate?
|
| There's something strange about the framing of the passive
| index fund scenario. Over 20-30 years? I'm not interested
| in beating that benchmark if I'm interested in increasing
| my net wealth in the next few years. Downvote away, this is
| my experience and feeling on the topic, not financial
| advice to others.
| CarelessExpert wrote:
| Well you can keep arguing based on your feelings. I'm
| arguing based on data. You can choose to ignore that data
| and try your luck. Just recognize your past performance
| will not guarantee future returns.
| atombender wrote:
| Stock picking basically has random outcomes. Sure, you may
| have a few lucky wins in the short term. But over time, your
| losing bets tend to outnumber your winning bets, and your
| returns experience what's called reversion to the mean.
|
| This phenomenon has been shown repeatedly in studies of
| trading behaviour among individual investors (e.g. [1] and
| [2]), who have been found to collectively _destroy_ wealth
| for all _other_ investors. Only an absolutely minuscule
| proportion of traders actually beat the market.
|
| As with any casino, there are winners and losers. But usually
| the house wins.
|
| [1] https://faculty.haas.berkeley.edu/odean/papers%20current%
| 20v...
|
| [2] https://www.sciencedirect.com/science/article/abs/pii/S13
| 864...
| ericjang wrote:
| "statistically proven reality" is an oxymoron - past
| outperformance of passive funds (statistics) are no guarantee
| of future returns (reality).
|
| Some of the math surrounding the derivation of the weakest
| forms of EMT also relies on the assumption that everyone has
| access to the same information, which is patently false in the
| world we live in. Even retail traders sometimes have an
| information edge (e.g. working at a biotech company or a
| specialized industry like semiconductors)
| yoz-y wrote:
| Please correct me if I'm wrong. But I assume that earning
| while holding is based on an assumption that the overall
| productivity continues to rise, while active trading is more
| of a zero sum game. Any gains you earn is somebody's loss.
|
| Now, the initial assumption could very well hit a wall.
| baq wrote:
| notice you're contradicting yourself: active traders don't
| only trade with other active traders, they also trade with
| those same passive funds that bet on continuous growth in
| fundamentals of companies and the hope that eventually that
| growth will be reflected in the stock price.
|
| then consider just how much shares passive funds move _all
| the time_ due to continuous rebalancing they do due to
| their self-imposed mandate. (reminder: etfs hold ~$5T worth
| of assets.)
| freetime2 wrote:
| > Then consider just how much shares passive funds move
| all the time due to continuous rebalancing they do due to
| their self-imposed mandate.
|
| One of the big selling points of passive, market weighted
| ETFs is their low turnover and high tax efficiency.
| Vanguard's S&P 500 ETF (VOO) has an annual turnover of
| 4%, for example. That's nothing compared to the turnover
| in an actively traded portfolio.
|
| Sure they do a lot of trading volume to account for
| inflows and outflows from the ETF. But one of the very
| nice properties of market weighting is that there is
| hardly any rebalancing needed as individual assets drift
| in price.
| thekyle wrote:
| Yes indeed, last I heard passive funds made up 50% of AUM
| but only 5% of trading. In other words, 95% of price
| discovery is still done by active managers.
| glofish wrote:
| It makes no sense to say that active trading is zero sum
| but passive trading isn't.
|
| Either both are or none are.
|
| Holding an asset for N days does not magically flip it from
| category to the other.
| AnimalMuppet wrote:
| Yes, but a bit of no.
|
| Yes, if the market is overall rising, then active trading
| should enjoy that overall rise just like buy and hold
| does.
|
| But then why active trade? Because you think you can do
| better than passive. _That_ part - the "doing better"
| part - is zero sum. In fact it's negative sum, because of
| transaction costs.
| bkberry352 wrote:
| I don't think anyone would argue with the statement "if you
| possess an information advantage then you're better off
| actively trading". It's mostly in the situation where you
| don't have an information advantage that passive investing
| outperforms (on average). The fun part is that everyone
| _thinks_ they have an information advantage, but fewer really
| do.
| xiphias2 wrote:
| Maybe a16z doesn't like it, but ,,buy and hold'' active investing
| works quite well.
|
| Passive investing means doing what your bank advisor suggests.
| People are starting to realize that those advisors may not make
| smarter decisions on where the world is going than the people
| themselves.
| Ozzie_osman wrote:
| > Maybe a16z doesn't like it
|
| As investors in Robinhood I would imagine they love active
| investing.
| CarelessExpert wrote:
| That's not what "active" or "passive" mean in the investing
| context.
|
| Active investing refers to active equity or bond selection and
| investment with the goal of generating excess alpha (i.e.
| beating the market)
|
| Buying a traditional, managed mutual fund is a form of active
| investing.
|
| Passive investing involves buying a large, diversified
| portfolio of equities and bonds such that you hold a percentage
| of the whole market. This is "passive" because there's no
| attempt to select specific stocks. The goal is simply to match
| the market by owning a portfolio that's representative of the
| market.
|
| Buying an S&P 500 index fund is a form of passive investing.
|
| Both could be done in consultation with a financial advisor.
| xiphias2 wrote:
| Sure, you are right, but even with that definition somebody
| could have just bought Apple/Google/Amazon/Facebook/Tesla/
| other high growth stocks/Bitcoin 10 years ago, and just
| waited.
|
| I see more of this kind of active investing happening (people
| reading Tesla blogs and going to meetups as an example,
| deconstructing software updates to see how the models are
| being ported 1-by-1 to the new framework. Financial advirsors
| generally don't do this in depth due diligents for products
| (or at least I haven't met any).
|
| As an example I read through a part of the Bitcoin source
| code to see how well it's written before investing in it, and
| I haven't seen any financial advisor who even looked at its
| github repo, and they already have opinion on it.
| nly wrote:
| I mean it's a spectrum. If you put 100% of your wealth in SPY
| then you're actively choosing to disregard over half of the
| global investable equity market.
|
| Asset allocation is another active investment decision.
| lupire wrote:
| Article misses the point (perhaps due to their capital
| investments) that the resurgence in active trading is almost
| entirely just gambling, but exempted from casino regulation.
|
| Also, saying "no more" to refer to a blip fad is a ridiculous
| healdit.
| freetime2 wrote:
| Roaring Kitty's posts that kicked off the GME craze had some
| very thoughtful analysis. And recently I watched some videos
| about dividend investing on YouTube that I would consider
| reasonable investment advice.
|
| I agree that there is a lot of gambling and excessive risk
| taking going on. And I myself stick to a 3 ETF portfolio
| because I like the simplicity. But to call it almost entirely
| just gambling I think is missing the point. There is some
| interesting and good stuff happening now in the intersection of
| social media and low cost trading, and it makes sense I think
| for VCs to be investing in that space.
| danlugo92 wrote:
| What 3 ETFs do you invest on?
| freetime2 wrote:
| SCHB, SCHF, and SCHE.
|
| That's a bit of an oversimplification because I do have
| some other assets I've picked up over the years. But the
| bulk of my net worth is invested in those 3.
|
| If I were to start over again I might even just hold SCHB,
| which I feel has enough international exposure to make SCHF
| and SCHE somewhat redundant, while also being more
| efficient for taxation purposes.
| cbozeman wrote:
| > I watched some videos about dividend investing on YouTube
| that I would consider reasonable investment advice.
|
| Do you happen to have those links?
| hogFeast wrote:
| Without being totally dismissive of every person who has
| contributed to the platforms you mention...99.99% of the
| stuff on YouTube is terrible, and most of the stuff written
| about GME was total nonsense.
|
| It is difficult to convey this because, in the end, you have
| no idea either so you don't know whether there is useful
| stuff on YouTube or if I am just talking nonsense too...but
| it is so bad, and it gives the misleading impression that
| picking stocks is very easy. It isn't, people do CFAs
| (allegedly, a hard exam), MBAs, and work in fund management
| every day for decades...and will never come close to being
| profitable (indeed, what is amazing is how many people have
| no knowledge but end up doing okay...it is remarkable...the
| post is a perfect example, no content, no apparent
| understanding of investing...somehow the guy is a billionaire
| from investing, like Chamath...amazing).
|
| It is gambling (the distinction between gambling and
| investing is information), what most VCs are doing in the
| space is financial terrorism (stuff like WealthFront is an
| unbelievable scam, it is 1980s-style financial advice), and
| most people should take your approach (although it is still
| very easy to go wrong with 3 ETFs...most people will get
| there though).
| baq wrote:
| except it isn't: if enough gamblers stick to one ticker, they
| can break the market. options aren't roulette and stocks aren't
| blackjack. casinos don't have this failure mode.
|
| gamestop was the example of what happens in the limit - only
| the DTCC prevented a global financial crisis as a circuit
| breaker of last resort.
| nly wrote:
| Sports bookmakers will ban your ass if you look to be any
| kind of sharp, or engage in arbitrage (exploiting their slow
| pricing).
|
| Casinos wont let you put a billion $$$ on red or black just
| because they have a 1/37 edge on the roulette wheel. That
| variance is to high.
|
| There are failure modes
| kreeben wrote:
| If enough retailers work in concert they start to resemble
| HF's.
|
| >> if enough gamblers stick to one ticker, they can break the
| market
|
| HF's, I assume, has had this power all along and they
| probably tried more than once to break the market.
|
| So, what's the difference then, between internet hive minds
| and HFs and why should one take more blame than the other
| when it comes to "breaking things"?
| Scoundreller wrote:
| ... and with much lower commissions than betting on
| horse/footballer/dog races.
| nly wrote:
| Depends. There are sports betting platforms outside of the US
| that work like stock exchanges.
|
| Betting exchanges can offer good liquidity, tight spreads and
| commissions as low as 2%
| gruez wrote:
| Is it? Robinhood allows you to trade for free, but that's not
| the whole story. Bid-ask spreads add an implicit fee to each
| transaction. This is small for highly liquid stocks, but
| buying blue chip stocks directly also isn't exactly exciting.
| If you want the excitement of gambling you'd need to either
| use margin (borrowing fees) or options (worse spread).
| hogFeast wrote:
| If you bet on a liquid market, you will pay vig of
| something like 1-2%. Where I am, it is actually cheaper to
| bet (just think about how unbelievably fucked that is...you
| can see why VCs want to insert themselves into that) but in
| the US your trade costs are probably underneath that level
| all-in.
| matwood wrote:
| I do wonder if the surge will die down as everything opens back
| up. When the world closed down and there were no sports, there
| was nothing to gamble on. When RH was blowing up around GME,
| stats came out that many of their customers were playing around
| with relatively small amounts money. The amounts sounded pretty
| similar to what I hear people talk about throwing on a game.
| $25-$100 for the excitement.
| WalterBright wrote:
| One thing active trading does is subject you to much higher short
| term tax rates. You'll also lose a bit on the spread every time
| you trade, even with zero commission brokerage fees.
|
| The longest stock I've held is Boeing (40 years).
| xyzelement wrote:
| I am a hedge fund guy who invests his own $$$$ passively so make
| of this what you will.
|
| There will always be a mix of active and passive.
|
| Fundamentally - passive only works when it follows smart active.
| Actives do expensive research and trade against each other to
| arrive at the consensus price. Passives trade at that price for
| "free." Since both get the same price on average but passives
| incur no cost, they win on average
|
| This breaks down if passives outnumber actives, _or_ if actives
| are exceptionally stupid.
|
| Imagine 100% is passive. That means any stock in an index will be
| bought tomorrow and forever regardless of price. I could exploit
| that in a ton of ways. For example, do a "squeeze" (think of the
| recent GME short squeeze but in reverse.)
|
| Or, imagine company X will obviously default but stock keeps
| going up because passives are obligated to buy. Very easy to
| exploit by going active!
|
| Finally - think about this. Does your index fund have any GME?
| That part of your portfolio trades at the price set by Reddit
| apes. The more of that goes on, the more tempting it is to go
| "active" on the other side.
| hehaheha wrote:
| That's not quite right about passive and active though. It
| almost always resets every quarter (or other liquidity events).
| Passive introduced delayed price discovery and as a result
| greater volatility around earnings (or liquidity events). But
| over medium to long term passive vs active should not matter.
| xyzelement wrote:
| Why isn't it "quite right?" I spelled out 3 scenarios that
| can play out and obviously will given the structure and
| incentives. Where do you disagree?
| hehaheha wrote:
| Because passive does not necessarily mean index. You can be
| passive and concentrated (see ARKK). And more importantly
| real world indices are moving target to begin with. They're
| just very rough approximation of market basket. SPX is not
| representative of market as it relates to mpt at all. In
| fact that's likely one of the biggest myths in modern
| finance.
| xyzelement wrote:
| The fact that Arkk's own website refers to itself as an
| _active_ equity etf should prompt you to reconsider your
| definition of these terms.
| [deleted]
| the_local_host wrote:
| "Imagine 100% is active" <- Did you mean "Imagine 100% is
| passive"?
|
| That said, I as a buyer-and-holder, I welcome the hordes of
| active traders willing to expend time, effort, and money to
| discover the price that I too will be able to trade at.
| xyzelement wrote:
| Thanks! Fixed!
| kreeben wrote:
| >> think of the recent GME short squeeze but in reverse
|
| Reverse how? There are so many axis I don't know which to use
| as the basis of my flip. If you care to, please explain a bit
| more in detail.
| xyzelement wrote:
| Flip it on all axis, I guess :)
|
| But, sure. Let's say I know that you (index fun) are
| obligated to buy stock X tomorrow and over all foreseeable
| future. I am gonna hoard those shares at no risk and sell
| them to you at a VERY VERY painful price, since you have no
| room to say "that's too expensive, no thanks"
| pedrocr wrote:
| Your active strategies are not against passive traders, they're
| against other active traders. You can't create one of those
| differential bets trading only with index funds as they won't
| take the other side of the unbalanced position you want as
| they're obliged to follow the index. In your scenarios you'd be
| winning against some other active investor taking the other
| side of the bet. Active as a whole can only beat passive as a
| whole if the market becomes so screwed up there's too much
| tracking error for passive to work properly. At that point the
| passive index no longer represents the market average and the
| active traders can take a larger share of the gains.
| playingchanges wrote:
| Tell that to all the active managers who bailed last spring
| instead of holding their tech stocks lol.
| m3kw9 wrote:
| When ever a16 posts articles there is always bias to the
| companies they invested within.
|
| Long trade is definitely still around, just wait till everyone
| has other things to do
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