[HN Gopher] Index funds officially overtake active managers
___________________________________________________________________
Index funds officially overtake active managers
Author : andsoitis
Score : 157 points
Date : 2022-05-22 14:12 UTC (8 hours ago)
(HTM) web link (finance.yahoo.com)
(TXT) w3m dump (finance.yahoo.com)
| westurner wrote:
| Index fund: https://en.wikipedia.org/wiki/Index_fund
|
| > Comparison of index funds with index ETFs: _In the United
| States, mutual funds price their assets by their current value
| every business day, usually at 4:00 p.m. Eastern time, when the
| New York Stock Exchange closes for the day. [40] Index ETFs, in
| contrast, are priced during normal trading hours, usually 9:30
| a.m. to 4:00 p.m. Eastern time. Index ETFs are also sometimes
| weighted by revenue rather than market capitalization. [41]_
|
| Survivorship bias > Examples > In business, finance, and
| economics: https://en.wikipedia.org/wiki/Survivorship_bias
| terabytest wrote:
| All the things I've read about passive funds have pointed in the
| same general direction. I can completely buy the reasoning but I
| worry I'm missing part of the point, which brings me to my
| question.
|
| In a scenario where passive funds are the best investment vehicle
| when looking at long term returns, what's the role of buying
| and/or trading individual stocks?
|
| Are there cases in which you'd prefer stocks over funds?
|
| I've got some Netflix, Microsoft and Apple stock which I plan to
| keep for the long term. I could never figure out if that money
| would've been better spent as a fund purchase.
|
| What trips me up is stocks tend to lead to bigger earnings (when
| things go right) and companies like Apple are almost certainly
| going to remain valuable for a long time.
|
| What am I missing?
|
| Edit: this has been a recurring theme in discussions I've had
| with my dad (who's a financial advisor, ironically). I've pointed
| out to him that passive funds seem better but he keeps wanting to
| put my money into stocks, active funds or sometimes narrow,
| low(er) cost managed funds (e.g. biomedicine and robotics stuff).
| jt2190 wrote:
| > In a scenario where passive funds are the best investment
| vehicle when looking at long term returns, what's the role of
| buying and/or trading individual stocks?
|
| Just to be clear, there are two interpretations (possibly more)
| of "best" in your question:
|
| * an index fund is "best" if its returns are greater than
| picking individual investments yourself.
|
| * an index fund is "best" if it is the quickest/cheapest way to
| balance risk and reward over the long term.
|
| I would guess that the majority of investors in index funds are
| looking for the quickest/cheapest approach.
|
| If your appetite for risk is greater and you have some time
| available time to manage things yourself, you can certainly
| manage your own portfolio.
| doovd wrote:
| > what's the role of buying and/or trading individual stocks?
|
| Loads of reasons to do so:
|
| 1. You might have enough alpha to beat the returns of an index.
|
| 2.You prefer a more market neutral strategy and construct your
| own basket, maintaining it over various timescales.
|
| The fact is that most of these reasons don't apply to your
| average retail investor though.
| terabytest wrote:
| Would you be willing to go into more detail about those two
| reasons? I feel I don't have enough experience to understand
| the reasoning underlying them.
| ironSkillet wrote:
| I can try to provide some additional information:
|
| 1. If you have a view of current market dynamics that you
| think many other investors have wrong, it can be profitable
| to go long/short an individual stock. E.g. you have some
| data suggesting that company XYZ is going to have a great
| quarter relative to market expectations, and buy some of
| the stock. Hedge funds do this all the time, with mixed
| success.
|
| 2. Some investors don't want to be exposed to the up/down
| trends in the overall market, and would prefer an investing
| strategy whose return/risk profile is independent of the
| general market. You can do this by creating long/short
| portfolios in individual sectors/stocks. For example, if
| you are long stock A, short stock B, you can make money if
| the market rises _or_ falls, as long as you were right
| about the relative performance of each stock. In a rising
| market, you would make money if stock A gained more than
| stock B. In a falling market, you would make money if stock
| A lost less than stock B.
| lawn wrote:
| > Are there cases in which you'd prefer stocks over funds?
|
| They're more fun.
|
| > What trips me up is stocks tend to lead to bigger earnings
| (when things go right)
|
| Cryptocurrency investments also tend to bigger earnings when
| things go right.
|
| The crux is the WHEN and IF you buy the right stock at the
| right time AND IF you sell it at the right time. Which most
| people cannot do consistently, meaning it's more up to luck
| than skill.
|
| > I've pointed out to him that passive funds seem better but he
| keeps wanting to put my money into stocks, active funds or
| sometimes narrow, low(er) cost managed funds (e.g. biomedicine
| and robotics stuff).
|
| Your dad sounds like a horrible financial advisor if that's the
| investment advice he's giving his customers.
| digianarchist wrote:
| It's worth reading A Random Walk Down Wall Street. Most
| actively managed funds fare worse than passive ETFs over a
| large enough investment timeline.
|
| Individual stocks are volatile and shouldn't be used as the
| bulk of one's retirement portfolio.
|
| It's all about risk analysis and mitigation.
| JKCalhoun wrote:
| Or read anything by "Jack" Bogle (R.I.P.).
| samjmck wrote:
| > companies like Apple are almost certainly going to remain
| valuable for a long time
|
| Based on what? At the end of the day, that's speculation. Who's
| to say Apple and other stocks you're holding won't suddenly
| stop beating the market?
| hendzen wrote:
| my personal theory is that active management can still produce
| market-beating returns but the good active managers will rapidly
| grow their capital base to huge levels where they don't need much
| outside investment.
|
| On the other hand - now we have a situation where most investment
| savings by individual investors are tracking passive indexes. But
| if everyone is indexing - what determines the relative weight of
| each stock in the index?
|
| The answer is active investors. But with an increasingly smaller
| field of increasingly skilled investors (with more discretionary
| capital), we end up with the valuations of companies (and thus
| how societal time is allocated) competitively determined by a
| fierce prediction competition between the top active managers
| (Renaissance, DE Shaw, Citadel, etc).
| qznc wrote:
| I guess the big question how much active management is good.
| According to the article for funds it is now roughly 50%. I
| believe even 10% is plenty for market efficiency.
| JudgePenitent wrote:
| How do you arrive at 10%?
| elromulous wrote:
| I was under the impression the relative weights are (often)
| simply proportional to their market cap. Afaict that's how that
| works for the sp500 at least.
| hendzen wrote:
| Exactly, the relative weights are often proportional to the
| market cap. So if I invest $1M in the S&P that doesn't
| actually change the relative weights of the stocks in the
| index (mostly), since the impact on all of the underlying
| stock market caps should be roughly even as more money flows
| in to the stocks with higher market cap and smaller sums flow
| in to the stocks with lower market cap.
|
| So in the case that say Meta's metaverse initiatives suddenly
| start taking off with the general population, it will take
| active investors to invest more in FB to increase FB's
| marketcap relative to the other stocks in the index so that
| passive investors are "correctly" allocating to stocks in
| proportion to their earnings potential.
|
| Obviously there are some caveats here. Passive investors
| still have to choose an index to invest in, and inflows in to
| one narrow index (i.e. QQQ) will affect the weights of
| particular stocks in broader indexes. But the point stands
| that the relative marketcap ranking between stocks in the
| index is not affected much by in/outflows in to a particular
| index, and in some sense indexes are outsourcing their stock
| picking to active investors that actually try to accurately
| value individual stocks on an absolute and relative basis.
| anonu wrote:
| The financial markets are a fantastic ecosystem. There are all
| types of players out there: short-term vs long-term, high-
| frequency vs low-frequency, technical chart readers,
| fundamentals, macro, hedgers, punters, speculators, 401k
| managers, retirees, r/wsb, retail, institutional.
|
| For as long as there have been markets, there are people who
| think they can beat them. So active management isn't going
| anywhere and it certainly wont disappear. There will certainly be
| a time when the active managers win out over passive.
|
| On a related note: I have this particular view that most active
| managers inside trade. (Look at Steve Cohen, SAC/Point72 - the
| insider trading was rampant, and I assume that if it was this
| prevalent and the largest most sophisticated of funds - then its
| probably pretty pervasive). I think the SEC's continuous
| crackdown on systematic insider trading is partly responsible for
| the long decline of active management.
| MuffinFlavored wrote:
| is technical chart reading real? does it really yield any
| results?
| gitfan86 wrote:
| Active managers make way more money selling their fund and
| increasing deposits than actually beating the market.
|
| So they will do things like promote "downside protection",
| claiming that their returns will be close to Russel 2000, but 90%
| less likely to go down by 2x more than the Russel 2000 in any
| year. Which is bullshit because anyone could put 80% of their
| money in Russel 2000 and 10% in cash and 10% in gold and get the
| same guarantee without paying anyone for it.
| melony wrote:
| Cash and gold are not the risk free rate.
| JumpCrisscross wrote:
| > _Cash and gold are not the risk free rate_
|
| In finance jargon, "cash" is typically taken to mean "cash
| and cash equivalents," _i.e._ money market assets.
| sprash wrote:
| This is a macro phenomenon and will stop soon since the central
| bank has stopped printing money. Since 2008 major Central Banks
| are actively buying bonds in droves which companies use to buy
| back their stock and as a result increase prices of their stock.
| The passive strategy will not work anymore now because companies
| with high capital costs will get hammered.
| throw0101a wrote:
| William F. Sharpe published the very short (two pages) article
| "The Arithmetic of Active Management" in 1991:
|
| > _Over any specified time period, the market return will be a
| weighted average of the returns on the securities within the
| market, using beginning market values as weights[3]. Each passive
| manager will obtain precisely the market return, before costs[4].
| From this, it follows (as the night from the day) that the return
| on the average actively managed dollar must equal the market
| return. Why? Because the market return must equal a weighted
| average of the returns on the passive and active segments of the
| market. If the first two returns are the same, the third must be
| also._
|
| > _This proves assertion number 1. Note that only simple
| principles of arithmetic were used in the process. To be sure, we
| have seriously belabored the obvious, but the ubiquity of
| statements such as those quoted earlier suggests that such labor
| is not in vain._
|
| > _To prove assertion number 2, we need only rely on the fact
| that the costs of actively managing a given number of dollars
| will exceed those of passive management. Active managers must pay
| for more research and must pay more for trading. Security
| analysis (e.g. the graduates of prestigious business schools)
| must eat, and so must brokers, traders, specialists and other
| market-makers._
|
| > _Because active and passive returns are equal before cost, and
| because active managers bear greater costs, it follows that the
| after-cost return from active management must be lower than that
| from passive management._
|
| * https://web.stanford.edu/~wfsharpe/art/active/active.htm
|
| And on why picking a winning stock is so hard (first edition
| 1973):
|
| * https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
| throwk8s wrote:
| But does it matter that the category of "active managers"
| achieves near-parity (after costs) with index funds if you're
| not able to maintain a running bet on the whole pool of active
| managers (i.e. you have to pick one or more specific managers)?
|
| For instance, if today's active managers always lose their
| asses to new active managers arriving tomorrow, then any active
| manager you actually give your money to today is going to do
| _way_ worse than an index fund, not just somewhat worse due to
| costs.
|
| The set of active managers actually available at a given moment
| in time might be 100% long-term losers.
| jt2190 wrote:
| A clearer title (from the article) would be:
|
| Retail investors' holdings in index funds exceeds active funds
| for the first time
|
| More specifically:
|
| > As of March 31, Morningstar says, retail investors had $8.53
| trillion invested in index mutual funds, while $8.34 trillion
| worth of assets were invested in actively-managed funds.
| dangus wrote:
| I've been something of a Boglehead for a long time, but every few
| years or so I try to look up analysis of active funds to try and
| see if they're starting to beat the market as a whole.
|
| I shouldn't be surprised, but I can't help always feeling a bit
| of surprise when the answer always ends up being "nope, only
| 10-20% of active managers are beating the market."
|
| So, if you're going for actively managed funds, you've got a
| pretty low chance of actually picking a good one.
|
| It's no wonder index funds have now become the majority.
|
| I have to admit that I don't know enough about how the financial
| markets work to know what would happen if 100% of investors went
| with passive funds. How would that even work? Is that even
| possible?
| Glyptodon wrote:
| It might be the case that we need to consider owning
| competitors an illegal conflict of interest, as if the whole
| market is majority owned by passive owners it's not so much a
| market of competitors as sibling subsidiaries.
| bombcar wrote:
| Bogle himself talks about a bigger danger than price discovery
| etc - when all companies are owned by index funds effectively
| nobody owns them - and so they'll be run by the managers for
| the managers.
|
| http://johncbogle.com/wordpress/wp-content/uploads/2019/08/n...
|
| It's likely that we _need_ to actually take ownership and not
| just let everything go as it goes forward.
| Consultant32452 wrote:
| In effect, they are owned by Vanguard, Blackrock, Fidelity,
| etc. Those firms buy the shares with your money, then those
| firms pick the boards of the companies they bought with your
| money. So basically the boards of a hand full of the big
| investment firms own and run every publicly traded company.
| tryptophan wrote:
| I dont understand why congress doesnt just mandate that
| voting rights go to the ultimate owner in index funds, no
| the management firm. Would be a pretty simple fix.
| Consultant32452 wrote:
| I understand why.
| traceroute66 wrote:
| Its actually a very poorly written article, more clickbait than
| actually saying anything useful.
|
| Case in point, title says "active managers" ...but if you read
| the article its actually "actively managed funds".
|
| Which means that before we've started we're already deep into
| Apples & Oranges comparisons with "index funds" vs "actively
| managed funds".
|
| "Index funds" are simple, they track an index. (oversimplified,
| there are technicalities, but we'll leave it at that).
|
| "Actively managed funds" meanwhile have a defined remit, and each
| fund will have a different remit. They might be limited as to
| sectors, company size, market technicalities or anything else.
|
| It is also likely the case that there is less interest in
| "actively managed funds" because if you are in the market for
| "actively managed" then you may well be constructing your own
| portfolio of individual equities rather than just buying a fund.
|
| Furthermore, "index funds" can be used by money managers as part
| of a balanced portfolio. For example, they might pick individual
| equities in markets/sectors that they are familiar with, and then
| use index funds for broader geographical or other coverage.
|
| So in essence the Yahoo article is a waste of words and is doing
| everyone a disservice, including the index funds it seeks to
| promote.
| abirch wrote:
| Most active funds are in fact mostly beta (indexed funds) with
| an exception of 5%.
|
| Most articles are worthless, but it's hard for media outlets to
| say that nothing meaningful happened in their sector today.
| [deleted]
| melony wrote:
| Are there index funds that are similar to hedge funds? I am
| looking for indices that generate returns that are _uncorrelated_
| to general market performance. Because that 's what the _hedge_
| in _hedge funds_ mean.
| shneefLeopard wrote:
| sideshowb wrote:
| Some people use a emerging markets index for that, it's at
| least a little uncorrelated to western performance
| nh23423fefe wrote:
| Everytime one of these articles comes up, someone says, "but who
| will do price discovery, this is terrible"
|
| What's the argument that active managers aren't just rent seeking
| parasites lying about their roles? Why have active fees gone down
| if they provided value all along?
| blitzar wrote:
| > "but who will do price discovery, this is terrible" - just
| rent seeking parasites lying about their roles
|
| I think you copied and pasted your rant from a different rant
| about finance as it really doesnt have anything to do with
| this.
| [deleted]
| oneoff786 wrote:
| If everyone invests in the sp500 then the price of the sp500
| will climb, guaranteed, because you know that next months
| paychecks will purchase more of it.
|
| You can't really do anything about this even if you're actively
| aware of this mechanism and think it's fundamentally over
| valued.
|
| It's like a decentralized Ponzi scheme
| kaashif wrote:
| > It's like a decentralized Ponzi scheme
|
| A Ponzi scheme is a type of fraud where someone _lies_ about
| where the money paying off earlier investors is coming from -
| they say it comes from investment in some kind of business or
| other businesses, but it actually comes from later investors
| ' investments.
|
| The stock market is transparent, it is obvious that when you
| buy something, part of the return will come from a later
| investor buying it from you - that's the whole point of
| buying something.
|
| It's not a Ponzi scheme if there's no-one lying about where
| the money comes from.
| thrwyoilarticle wrote:
| >If everyone invests in the sp500
|
| ...being the key phrase. There's a long way to go to 100%.
| oneoff786 wrote:
| It doesn't need to be 100%. It just needs to be a fairly
| large portion of the holders of the sp500.
|
| Technically it can't be 100%, else there's nobody to buy
| from.
|
| Many of the heavily targeted companies are at 20-30% index
| fund ownership.
| gruez wrote:
| What _isn 't_ a ponzi scheme these days? If you're passively
| investing in stocks, it's a ponzi because of the reason you
| outlined. However, if you're actively investing and bought a
| stock that's a little too popular (eg. tesla), then that's
| also a ponzi because "the company doesn't make a profit and
| the way people are making money is from new investors paying
| older investors". Hell, even if you only buy blue chip stocks
| with reliable earnings, some of your original complaint is
| still there (ie. people mindlessly buying it because they
| know it's reliable, new investors paying old investors).
| fartcannon wrote:
| I cant tell if youre joking or not because I sorta do think
| it is all a scam. I think the stock market is a way to keep
| the sociopaths doing something less dangerous than
| continuous war and insurrection. Whether intentionally or
| not, I think that's it's primary value.
|
| It basically magnifies wealth discrepancy which is what the
| sociopaths want. The rest of us just try not to become poor
| by playing their games. Whenever everyone gets too close to
| fair, they invent a new game, or take the ball and go home.
| You know? I'm only sort of kidding. :D
| andsoitis wrote:
| > Whenever everyone gets too close to fair, they invent a
| new game, or take the ball and go home.
|
| who is "they"?
| fartcannon wrote:
| Sociopaths
| TedDoesntTalk wrote:
| What an interesting world view.
| fartcannon wrote:
| I try and think about it from our tribal, small group
| primate origin perspective. I hope you're not mocking me,
| but if you are, I still do think it's interesting
| actually. :)
|
| Like maybe we didn't kill the neanderthals, you know? I
| think we probably convinced them to kill each other.
| That's kind of our specialty.
| TedDoesntTalk wrote:
| I'm not mocking you. But if I had that world view, I
| might not get out of bed in the morning.
| JumpCrisscross wrote:
| > _if I had that world view, I might not get out of bed
| in the morning_
|
| It might be the inverse. Someone not wanting to get out
| of bed in the morning projecting that view onto the
| world.
| fartcannon wrote:
| It's neither! What's the problem with trying to explain
| human motivations like greed using our evolution? I
| genuinely think it's interesting.
| JumpCrisscross wrote:
| > _What 's the problem with trying to explain human
| motivations like greed using our evolution?_
|
| Look up Social Darwinism. Broadly: most evolutionary
| explanations for social behaviour aren't science. They're
| parlour tricks. One can posit reasonable-sounding
| explanations for any behaviour, real or hypothetical,
| none of which is testable.
|
| Example: I can construct individual-selection arguments
| for humans being evolved sociopaths and group-selection
| arguments for humans being collectivist sheep. There is
| truth in both statements. But their predictive value is
| totally dependent on the immeasurable mix and mechanics
| thereof, all of which is blissfully ignored, both in
| substance and evaluation, by this framing.
| fartcannon wrote:
| I think maybe you're talking about something else, or
| believe that I am, or I'm misunderstanding you because it
| feels like you're trying to tell me that my _imagination_
| is a parlour trick. Ive been on the internet for a long
| time and this is the first time that has ever happened.
|
| I value the time you put into explaining your position,
| however I dont think creative thought exercises like
| trying to explain why wall street is full of a-holes
| using evoluton is a parlour trick. Because there's no
| trick. It's just a thought. On a discussion forum. Where
| people discuss things.
| JumpCrisscross wrote:
| > _my _imagination_ is a parlour trick...there 's no
| trick. It's just a thought_
|
| There _is_ a trick. You 're claiming artistic license as
| a fictional narrator. That's fine! That's a thing!
|
| But it doesn't work when presenting explanations for the
| real world. One in which the stock market is a "scam"
| whose "primary value" is "to keep the sociopaths" busy
| while it "magnifies wealth discrepancy which is what the
| sociopaths want" all while if someone other than "they"
| start winning "they invent a new game, or take the ball
| and go home" [1].
|
| Evolutionary explanations of sociology have a long
| history of being deeply flawed. At best, they're
| arbitrary [2]. As explanations for the present state of
| the world, they aren't useful. As fictional devices,
| sure, why not.
|
| [1] https://news.ycombinator.com/item?id=31469336
|
| [2] _Caveat: evolutionary thinking works when one starts
| with real-world observations and supposes how they
| evolved. Cf: the evolution of altruism in humans [a]. It
| fails when one supposes evolutionary pressures to predict
| human behavior, e.g. natural selection and social
| competition exist, herego we should expect our leaders to
| be sociopaths. Observation, not supposition, before
| conclusion._
|
| [a] https://pubmed.ncbi.nlm.nih.gov/25061670
| fartcannon wrote:
| I notice you left out the 'I think' from when you quoted
| me. That's how you were supposed to know it's not
| fiction, it's not a parlor trick, it's a thought. Kinda
| like brainstorming. Suggesting there is a 'trick' to what
| I'm writing implies (to me at least) that I'm attempting
| to deceive. I assure you I am not.
|
| And since we're quoting each other, you opened with, "It
| might be the inverse. Someone not wanting to get out of
| bed in the morning projecting that view onto the world."
| I assure you I love getting out of bed. On the other
| hand, I kinda get the vibe the discussion you're having
| is a continuation of one you've had before with someone
| else and maybe you're projecting it on to me?
|
| I checked out your profile and now I understand! Haha.
| Fun times. Thanks for the links.
| fartcannon wrote:
| Ah, I see. Well, I assure you that it invigorates and
| inspires me. I consider it one of my stronger assets and
| I highly recommend it.
| kaashif wrote:
| While the stock market may be stupid, it's not a Ponzi
| scheme. A Ponzi scheme involves a fraudster lying about
| where the money is going and coming from, and thus
| defrauding people.
|
| If people know what they're buying, and they later really
| sell it to a willing buyer without lying to them, that's
| not even any kind of fraud, let alone a Ponzi scheme.
| salawat wrote:
| It's funny, because I have yet to have a company give me
| access to the entirety of their books to analyze.
|
| That's info asymmetry.
|
| Ergo, lying.
|
| Specifically by omission.
|
| So the Ponzi essence is still there.
| JumpCrisscross wrote:
| > _I have yet to have a company give me access to the
| entirety of their books to analyze_
|
| Have you gone to a shareholder meeting? Submitted a
| question to an earnings call?
| datadata wrote:
| Debt based monetary policy is the root ponzi here. Our rate
| of assuming new debt depends on the assumption of endless
| economic growth.
| [deleted]
| oneoff786 wrote:
| Making shareholders liable for company debts in the event
| of bankruptcy would be a start.
| shukantpal wrote:
| That's a foolish idea, happy to know it's from a one off.
| oneoff786 wrote:
| We're all one offs in the end
| [deleted]
| renewiltord wrote:
| Okay, I'll buy your 358 VOO Puts expiring May 27 at 1C/ each.
| Easy money for you. I will pay you $100 for 100 such
| contracts (usual lot size 100).
|
| EDIT: Counter offer or decline acceptable. I can go up to $1k
| on this. I have money in play from this site up to 3x payout.
| Your call.
| oneoff786 wrote:
| You edited your post to add more detail for some reason.
| No, it's still not clever.
|
| Believing passive investing at scale causes irrational
| rises in price does not mean it's wise to assume the price
| will definitely go up or down. It's obviously not the only
| effect in the market.
|
| Going long on the general market is a bet that things will
| generally continue. That's about it.
| renewiltord wrote:
| I comment in bursts, which has me hit rate limits on HN.
| Then I have to use edit-functionality till rate-limit-
| expiry.
|
| In any case, if you don't want to play that's fine. I
| enjoy this; you don't. No reason to be offended. Offer
| open to others. Has been taken up in the past. Fun for
| all.
| oneoff786 wrote:
| These gotchas aren't nearly as clever as you think.
| [deleted]
| legitster wrote:
| Well, we've kind of known that the benefits of active
| management would be diminishingly small. In theory they could
| be working just as hard, but at this point they are being paid
| to clip coupons that aren't there.
| pkulak wrote:
| > but who will do price discovery, this is terrible
|
| Whoever actually believes they have more information than the
| market and is willing to stake their own money on the
| proposition. I'd guess that we need surprisingly few of those
| folks to keep the machinery humming.
| whimsicalism wrote:
| Price discovery can be left to the prop traders.
| throw0101a wrote:
| > _Everytime one of these articles comes up, someone says, "but
| who will do price discovery, this is terrible"_
|
| Note that this has been around since 1980:
|
| > _The Grossman-Stiglitz Paradox is a paradox introduced by
| Sanford J. Grossman and Joseph Stiglitz in a joint publication
| in American Economic Review in 1980[1] that argues perfectly
| informationally efficient markets are an impossibility since,
| if prices perfectly reflected available information, there is
| no profit to gathering information, in which case there would
| be little reason to trade and markets would eventually
| collapse.[2]_
|
| * https://en.wikipedia.org/wiki/Grossman-Stiglitz_Paradox
|
| Paper:
|
| * http://www.dklevine.com/archive/refs41908.pdf
|
| * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=228054
|
| Price discovery happens at the edges: you probably don't need a
| lot activity for it. I think we're seeing a lot of the also-ran
| active managers (slowly) being weeded out, and the remainders
| will increasingly be those that actually manage to get things
| right every so often.
| Majromax wrote:
| > Note that this has been around since 1980:
|
| The strong efficient market hypothesis combined with
| completely rational (no-noise) market participants leads to a
| "no-trade theorem." If anyone tried to buy or sell a security
| based on new information, other market participants would
| incorporate that attempt into their information about the
| market. The notional price would change (bid/ask), but the
| security wouldn't trade hands.
|
| This is of course absurd in practice because securities do in
| fact trade, but it tells us that we don't need random retail
| investors picking stocks with coin flips (or asset managers
| doing so and charging 2%/yr for the privilege) in order to
| discover fair prices.
| ItsMonkk wrote:
| This isn't taking into account that there is really no such
| thing as 'passive'. In reality, passive investors are
| constantly either investing with their paycheck, or selling
| in retirement. They are the world's simplest active
| investors. If you put money into passive then the index buys.
| If you request money, the index sells.
|
| So what you need to track is the net flows. If the net flows
| are positive, and there is so little active left in the
| market that no matter what the active investors do the stock
| still has positive net flows, then active has no other option
| than to buy. This eventually leads to stocks having an
| infinite price as there is no downward force. On the other
| hand, if net flows are negative, then prices go to 0.
| skybrian wrote:
| That's an interesting way of looking at it, but it seems
| incomplete because for every buyer, there is a seller. A
| paycheck isn't converted into stock, it's traded for it, so
| some other account gets the cash. Supply and demand meant
| that asset prices went up, but that meant that the sellers
| got more cash for less stock.
|
| Who was selling? Recent retirees did well when they sold,
| but is there more to it than that?
|
| It's an odd time when cash does poorly (inflation), bonds
| do worse, and the stock market fell. Prices are relative,
| though. I guess it's all relative to commodities and labor.
|
| It seems like increased debt due to higher-priced assets as
| collateral probably needs to be taken into account too.
| throw0101a wrote:
| > _This isn 't taking into account that there is really no
| such thing as 'passive'. In reality, passive investors are
| constantly either investing with their paycheck, or selling
| in retirement. They are the world's simplest active
| investors. If you put money into passive then the index
| buys. If you request money, the index sells._
|
| Passive investing means something, and what you are saying
| is not it. From William F. Sharpe, Nobel-winning economist
| who came up with capital asset pricing model (CAPM):
|
| > _A_ passive _investor always holds every security from
| the market, with each represented in the same manner as in
| the market. Thus if security X represents 3 per cent of the
| value of the securities in the market, a passive investor
| 's portfolio will have 3 per cent of its value invested in
| X. Equivalently, a passive manager will hold the same
| percentage of the total outstanding amount of each security
| in the market[2]._
|
| * https://web.stanford.edu/~wfsharpe/art/active/active.htm
|
| A "passive" investment strategy is _not_ about not-buying
| /selling, but rather about _not actively_ choosing
| particular financial instruments.
|
| > _Passive management (also called passive investing) is an
| investing strategy that tracks a market-weighted index or
| portfolio.[1][2] Passive management is most common on the
| equity market, where index funds track a stock market
| index, but it is becoming more common in other investment
| types, including bonds, commodities and hedge funds.[3]_
|
| * https://en.wikipedia.org/wiki/Passive_management
|
| Following a particular index (NASDAQ, Dow Jones, S&P 500,
| Russell 3000, Wilshire 5000, TSX, FTSE 100, MSCI EAFE) is
| passive investing, even if you put in money every pay
| cheque.
| jleahy wrote:
| Technically speaking the Dow would not be a passive
| investment (by the definitions above), as it's not market
| cap weighted.
| medvezhenok wrote:
| I think grandparent has a point - passive is a misnomer.
| Academic analyses of passive investing start right after
| the securities have been acquired and before they're
| sold, which pretends that passive flows have no effect on
| the market (by definition - << always holding exactly 3%
| >> implies no selling or buying, otherwise it is not
| possible)
|
| << Passive >> funds do buy & sell based on flows and
| tracking of the index, not to mention when companies IPO
| and/or drop in/out of things like the S&P 500. Market
| weighted fund might be a better overall name than
| passive.
| im3w1l wrote:
| That's a passive failure mode I haven't seen before. To
| elaborate on what you said:
|
| Imagine an index, and an index fund tracking it. The index
| fund will own x% of every stock in the index. Someone buys
| the index fund, and the index fund now try to achieve
| x+epsilon% in every stock.
|
| But what if 100-x% of the stock is owned by diamond-hands
| hodlers, that wont sell at any price? The index fund bids
| higher and higher, and the sellers refuse to let their
| shares go, making the price reach ridiculous levels.
|
| The price reaching 0 seems less likely, as there will
| always be bargain hunters.
| HALtheWise wrote:
| There's two key ways new stock can be created to avoid
| this risk: companies can issue it, or short sellers can
| create it. If the company sees its stock rising, it can
| and should see that as a cheap source of capital and
| absorb some of it through a stock sale to do more of
| whatever business they're in.
| nightski wrote:
| Short sellers do not create stock. They are selling
| borrowed stocks. What am I missing.
| svnt wrote:
| Synthetic longs.
| [deleted]
| nly wrote:
| Privileged market participants can definitely lend out
| more stock then they hold, provided eveurnting is
| collateralised
| ItsMonkk wrote:
| You think that companies are going to issue new stock in
| order to ensure that the value of their company doesn't
| go UP? If anything, the more they take out loans and
| buyback their stock, the faster it goes to infinity. And
| the faster it goes to infinity, the more collateral it
| has, to take out another loan, to buy more stock...
|
| And you think short-sellers are going to risk infinite
| losses? This is a prisoner's dilemma that you aren't
| going to win.
| jbay808 wrote:
| > If the company sees its stock rising, it can and
| should... absorb some of it through a stock sale
|
| That's ultimately down to the incentives in place. If the
| board members have a lot of options in their compensation
| package, they might prefer to see the stock price climb
| and climb. In fact if the incentives are set up that way
| they might do a buyback to help fuel the rise, even at
| the cost of longer-term harm to the company.
| blibble wrote:
| the genius thing about ETFs is they don't have to buy or
| sell the stock: others do it for them
|
| have a read about the creation/redemption mechanism and
| you'll see why this won't heppen
| thoughtstheseus wrote:
| They issue the person redeeming the the actual underlying
| securities. Then it's up to them to sell it. Fun model.
| dsr_ wrote:
| You're leaving out three factors: indexes are not static
| over long terms; the creation/destruction of new public
| corporations; and the possibility of existing public
| corporations offering more stock.
| nradov wrote:
| Index fund managers aren't idiots. Their trading systems
| still have a degree of sanity checking and human
| oversight, so they won't attempt to track the index
| exactly if things get weird. But for large-cap indexes
| like S&P 500, the "diamond-hands hodlers" lack the
| capital reserves necessary to really manipulate the
| market. At some point many of the underlying companies
| would also take advantage of excessive stock prices by
| issuing secondary offerings, thus increasing the supply.
| jeffreyrogers wrote:
| > What's the argument that active managers aren't just rent
| seeking parasites lying about their roles?
|
| That someone has to set prices and structurally index funds
| can't do that job. How are prices going to be set without
| active participants? You could do it by formula I guess, but
| that would be gamed by companies around earnings time and
| doesn't account for differences in industries or differences in
| corporate strategy.
|
| > Why have active fees gone down if they provided value all
| along?
|
| That's exactly what you would expect as more firms enter
| providing the same service. The same thing happens in every
| other market. More competition drives down margins.
| wsostt wrote:
| You're not considering that a lot of active managers are
| helping clients define bespoke investment strategies that suit
| their assets and liabilities. They set a strategy, pick a
| benchmark, and invest. In some cases, a portion of those
| investments may be passive instruments and other portions may
| be research-driven asset allocation by the manager.
| the_cat_kittles wrote:
| i think its all just bullshit to make the client feel like
| they are heard / in charge. its like a mutual agreement to
| make eachother feel important.
| [deleted]
| wsostt wrote:
| Clients are heard and in charge. These are smart people who
| will terminate the relationship if their goals aren't being
| met. This isn't your retirement account. These are accounts
| in the 9+ figure range.
| m3nu wrote:
| That sounds like a financial adviser, not a manager of an
| active fund.
| SkipperCat wrote:
| There are actively managed funds that hold stocks, bonds
| and other instruments and constantly balance those ratio on
| a daily basis to give investors a steady state of returns
| (think 4% to 6%). A lot of folks who want fixed income
| returns instead of cap gains growth purchase these funds.
| Retirees and pension funds are big consumers of these
| product.
|
| This requires complex daily work and would be nearly
| impossible for a financial advisor to perform.
| [deleted]
| 55555 wrote:
| Can you give any examples of these which can be bought
| via brokerage account?
| wsostt wrote:
| Not OP, but I doubt it. These are individual mandates
| with mandatory minimums in the tens of millions of
| dollars for a small shop.
| IMSAI8080 wrote:
| There'll never be a shortage of people who think they can beat
| the market. Market beating is just such a compelling illusion.
| Also passive funds are not quite 100% passive. What does
| everyone do when they're broke? Stop investing. How about when
| times are good? Pile more into investments. There's also many
| different types of passive funds with slightly different
| biases. There's world passive funds (which have maybe 40% not
| in the S&P). There's passive funds that track other specific
| countries. There's ESG passive funds that avoid oil companies
| and such. There's passive that skips China. There's investor
| biases in there and prices being discovered all over.
| Invictus0 wrote:
| Yes, Berkshire Hathaway and Renaissance are just figments of
| the imagination.
| lotsofpulp wrote:
| Has BRK outperformed SP500 since 2009?
| IMSAI8080 wrote:
| Now throw in all the other active funds and average them
| out. Also Berkshire would not have been the better
| investment over the last decade. Can you guarantee me
| Berkshire will pull ahead before I retire?
| Invictus0 wrote:
| What a silly thing to stay. Let me just ignore that and
| explain why Berkshire works. It's possible to beat the
| market because it's possible to buy $1 for $0.95. That's
| the whole trick. It takes a lot of work, a lot of smart
| people, and you have to make big enough deals to cover
| the cost of paying the managers, but yes, these
| opportunities exist and they are abundant. The real
| mistake is thinking that the market is a bunch of random
| number generators with no rhyme or reason to it. But no,
| there are no guarantees--the SPY doesn't come with a
| guarantee either.
| IMSAI8080 wrote:
| That makes no sense at all. What you're saying is it's
| possible to hire people who can see the future. Index
| tracking works because the market as a whole generally
| trends upwards if you wait long enough. This would be
| expected as the world generally gets richer and
| technology generally improves. The problem is you can't
| predict which exact company is going to do the improving.
| So just buy a very wide spread of companies and take the
| average. 80% of active managers fail to beat the market
| because they cannot see the future. The other 20% are
| lucky (today). If you want a lesson in the dangers of
| active management, look up Neil Woodford.
| svnt wrote:
| You only need to hire people who can see the future from
| the perspective of the market. It is entirely possible,
| and it is the reason why insider trading is heavily
| regulated.
| blitzar wrote:
| Berkshire is up 280% vs S&P up 180% for the last decade.
|
| That said Berkshire is a pretty poor example as it has a
| pretty diverse range of holdings, its basically a passive
| index of its own.
| lotsofpulp wrote:
| https://dqydj.com/sp-500-return-calculator/
|
| This site says SP500 with dividend reinvested is 270%.
|
| I also feel like SP500 has a lot less risk because
| politicians are very incentivized to provide a backstop
| to SP500 price, but not as much to BRK.
|
| Also, BRK is squeaking out 280% vs SPY 270% by being 25%+
| invested in a single company, Apple. That is a lot of
| extra risk for not a lot of extra return.
| IMSAI8080 wrote:
| That's incorrect, you forgot the dividends. I went with
| an analysis from last year where Berkshire was behind and
| was doing worse than the S&P. Now they're about evens.
| Berkshire is now an S&P500 tracker.
| legulere wrote:
| If passive funds are not passive like for instance synthetic
| ETFs and you cannot beat the market then how are they making
| money?
| LatteLazy wrote:
| The arguement in both cases is that if someone is doing
| something useful in a market (like price discovery) they'll be
| paid according to how useful they are. And if their pay exceeds
| the cost then they'll profit. If not then your guy (or girl, or
| other descriptor) isn't useful and you're paying them from your
| picket. But it's your job to check and move your money
| accordingly. And you'll be paid for doing so, and penalised for
| not doing so.
|
| If your active manager beats the index (in returns and risk)
| after fees then he is earning his keep both for you and the
| world in gen
| lvl102 wrote:
| Price discovery just happens on a different pace mostly around
| earnings. But you're still at the mercy of market makers which
| is a big problem on its own. We also have bonds/convertibles to
| help price securities.
| andi999 wrote:
| Personally, I dont think price discovery is the biggest
| problem, but no overseight of the board of directors. Etf do
| not actively vote (as far as i understand). So this opens up
| for management and minority owners to run the comopany badly
| (or even plunder it). This is a negative effect in the long run
| though.
| kwere wrote:
| they vote , usually against all stewardship bogus they like
| to signal [0].
|
| [0] https://shareaction.org/news/new-data-shows-scant-
| improvemen...
| matthewowen wrote:
| BlackRock absolutely votes. The concern is arguably the
| _opposite_: in the index model ownership is concentrated in a
| few large institutions with very broad diversification, which
| creates some odd incentives.
|
| Matt Levine has a bunch of articles touching on this topic.
| michaelt wrote:
| _> What 's the argument that active managers aren't just rent
| seeking parasites lying about their roles?_
|
| "That might be true of _other_ active managers - not me though,
| this fund I manage has outperformed the market over the past 10
| years. "
| dmoy wrote:
| * shovels records of 9 other defunct funds under the rug, to
| hide any evidence of survivorship bias *
| briHass wrote:
| Also, forgets to mention 'before fees'. When the ER is
| included, it is a loser compared to a low ER index fund.
| missedthecue wrote:
| Wouldn't fees go down as a result of more competition in the
| sector?
| jshaqaw wrote:
| Interest to revisit such militant attitudes should the current
| crash of inflated bullshit techcos continue.
|
| Is your kids 529 plan on the S&P. Well congrats - you got to
| buy Tesla at the peak of Elon's pump train just in time to be a
| ticket holder for his self-immolation show.
|
| Does your 401k hold small cap exposure to the Russell. Yippee
| you get to be the bag holder for a good chunk of the SPAC
| garbage VCs dumped into public markets based on things like
| projections that personal electric helicopter taxis would
| become ubiquitous in US urban markets by 2025.
|
| Passive investing got gamed by Silicon Valley and isn't exactly
| what Bogle had in mind when he got started.
| sepiasaucer wrote:
| I don't understand what point you are trying to make.
|
| Specific stocks being bad investments is not an argument
| against passive investing. The whole point of index funds is
| to diversify your portfolio so you track the overall market,
| not any specific stock or group of stocks.
|
| If you are assuming you know which stocks/sectors are under
| or overvalued, then I guess active investing makes sense, but
| that seems like a flawed premise to start from.
| FunnyBadger wrote:
| The market does price discovery if it's not program traded.
|
| What markets are doing is recording and publishing the results
| of auctions for the particular good as a time series of data.
| Indexes hide some of that but there's something far worse: HFT.
|
| The problem is that program trading and HFT has far more in
| common with the old Scientific American COREWAR game than it
| does with the fundamentals of price discovery. The buy/sell
| decisions are about gaming other players rather than
| discovering price. There are also nonlinear feedback loops with
| very short loop time constants created that are
| "nonconservative" in a physics sense and create instablity. The
| fact that hard limits are required to deal with flash crashes
| is a warning, not a solution!!
| FunnyBadger wrote:
| I thought this was shown to be true in terms of expected ROI more
| than 25 years ago - it was talked about in my MBA program.
| EVa5I7bHFq9mnYK wrote:
| Aside from costs, index funds may have outperformed because their
| share of the overtall pie has risen. If you consider an index
| fund to be an asset on its own, the price of that asset rises as
| more people invest in it. As a result, equities that are
| underrepresented in indices decrease on average, while those that
| are overrepresented - increase. We see evidence of this in the
| fact that equities tend to fall shortly after being removed from
| key indexes.
|
| So index funds outperform because their share increases, and
| their share increases because they outperform. Classic bubble
| equation.
| drawingthesun wrote:
| I thought this was always true?
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