[HN Gopher] Nevada's public employee pension fund invests passiv...
___________________________________________________________________
Nevada's public employee pension fund invests passively and beats
peers (2016)
Author : cpncrunch
Score : 228 points
Date : 2024-07-13 23:24 UTC (23 hours ago)
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| cpncrunch wrote:
| https://archive.is/hmkdj#selection-4317.0-4320.0
| jonahbenton wrote:
| (2016)
| cpncrunch wrote:
| Updated title.
| decasia wrote:
| I'm curious if this is demonstrably an optimal strategy for
| individual investment too... I haven't had much success getting
| any clear data about whether active management demonstrably
| produces better results.
| windwindow wrote:
| There's strong data supporting passive investment. I've found
| the stats in Andrew Hallam's book, "Balance: How to Invest and
| Spend for Happiness, Health, and Wealth"
| (https://www.amazon.ca/Balance-Invest-Happiness-Health-
| Wealth...) quite eye-opening.
| cornstalks wrote:
| There's the famous bet Warren Buffett won against an actively
| managed fund:
| https://www.investopedia.com/articles/investing/030916/buffe...
| elil17 wrote:
| Short answer re: investing in active managers (based on my many
| years listening to rationalreminder.ca) is that, if you
| eliminate some of the worst active managers, the average
| returns net of fees are the same. However, eliminating the
| worst managers is challenging (but not impossible) to do ex-
| ante. Even then, you're only getting the same average returns
| as indexing, not better. Plus, you will experience a higher
| dispersion with active managers (greater chance of extreme
| negative or positive outcome), which is not desirable. Because
| of these two issues, It's definitely better to pick an index
| fund.
|
| Re: picking stocks yourself, the answer is also pretty cut and
| dry. There's strong evidence no individual trader can expect to
| beat the market. Active managers can only beat the market gross
| of fees because they employ large teams of people to do a lot
| of work to gain a small edge (stuff like predicting retail
| sales numbers from satellite images of store parking lots).
|
| This is my attempt at summarizing a whole field of research in
| a few sentences. There are many more nuisances. I highly
| recommend listening to the Rational Reminder podcast if you're
| curious about this sort of thing. They interview a lot of
| academics.
| chii wrote:
| > a higher dispersion with active managers (greater chance of
| extreme negative or positive outcome), which is not
| desirable.
|
| some people prefer the chance to win the lottery rather than
| get a steady income stream.
| throwaway2037 wrote:
| Except this is a myth. You will not win the lottery without
| taking crazy amounts of risk. The active managers who do
| beat a major index for a long, long time almost do not
| exist in retail space, and they beat the market by a tiny
| amount (~1%). In my era Legg Mason was the most famous, but
| even they fell too.
| selestify wrote:
| How does that explain Warren Buffet's spectacular
| success?
| supertrope wrote:
| When you own one billionth of a company you are just
| along for the ride. When you buy a 10% or more stake you
| can influence the running of the company. Another aspect
| is he has offered liquidity to distressed companies like
| GE and got richly rewarded for it with favorable terms.
| anamax wrote:
| Someone with Buffet's success should exist by random
| chance. (Flip a fair coin enough times and it will come
| up heads 20 times in a row.)
|
| Also, some fraction of Buffet's success comes from deals
| that the rest of us don't have access to.
| mewpmewp2 wrote:
| Yeah, I have tried to simulate this several times under
| different conditions. Given zero sum game and random
| odds, there is always going to be small percentage who
| have a lot and most will have below what they started
| with. It is easy to explain as well, if you for example
| start with $1000 and you have 50% odds of winning 10%
| every time. If you win and lose 50% you are going to be
| below what you started.
|
| If you always win after lose and lose after win, then it
| would go like this:
|
| 1. $1000
|
| 2. $1100
|
| 3. $990
|
| 4. $1089
|
| And so on... After 100 turns you would have only around
| 600 - 700.
|
| But it's a zero sum right. Where does the 300 - 400 go?
| It goes exponentially to select few who by random chance
| have more wins than losses.
|
| In fact the longer it goes on, the higher odds of there
| being outlier with a lot - you might expect that everyone
| would converge around $1000, but that is not the case.
|
| I did an example run with 10 000 investors, each doing
| 1000 trades, each trade they bet 10% of their portfolio,
| with 50% odds of winning.
|
| First investor had 562 wins and 438 losses, with
| $1,666,061.
|
| Median investor had only $7 left with 500 wins and 500
| losses.
|
| Top 10th percentile investor had $364 with 520 wins and
| 480 losses.
|
| So interestingly even an investor that had 40 wins more
| than losses, lost 2/3 of portfolio.
| redox99 wrote:
| Stock market is not zero sum.
| mewpmewp2 wrote:
| Yes, but in terms of beating the market it should be.
| derriz wrote:
| Buffet isn't a passive investor. Berkshire Hathaway have
| often taken a very active role in the running of their
| acquisitions - appointing managers, setting strategy,
| merging/splitting off subsidiaries, etc. This is as much
| managing as investing. If Buffet was a pure stock picker,
| then he would be an interesting case in the active vs
| passive investment debate.
| JumpCrisscross wrote:
| > _How does that explain Warren Buffet's spectacular
| success?_
|
| Buffett buys "cheap, safe, high-quality stocks" with
| leveraged "financed partly using insurance float with a
| low financing rate" [1]. TL; DR He's doing private equity
| with discipline.
|
| [1] https://www.aqr.com/Insights/Research/Journal-
| Article/Buffet...
| throw0101d wrote:
| > _How does that explain Warren Buffet's spectacular
| success?_
|
| 1. Buffett has been underperforming the S&P 500 for about
| twenty years now:
|
| * https://www.linkedin.com/pulse/warren-buffett-has-
| underperfo...
|
| * https://news.ycombinator.com/item?id=37827101
|
| For most people who are saving for retirement between the
| ages of (say) 30 to 65, that's most of their investing
| lifetime, and such underperform could radically effect
| the life they can live once they start working. Do _you_
| want risk your proverbial Golden Years simply because you
| chose not to take the market average returns?
|
| 2. While Buffett is a better-than-average investor (and
| certainly better than me), the main reason why we know
| him is because he's so rich, but as Morgan Housel notes,
| the vast majority of that wealth has come from
| compounding:
|
| > _As I write this Warren Buffett's net worth is $84.5
| billion. Of that, $84.2 billion was accumulated after his
| 50th birthday. $81.5 billion came after he qualified for
| Social Security, in his mid-60s. Warren Buffett is a
| phenomenal investor. But you miss a key point if you
| attach all of his success to investing acumen. The real
| key to his success is that he's been a phenomenal
| investor for three quarters of a century. Had he started
| investing in his 30s and retired in his 60s, few people
| would have ever heard of him. Consider a little thought
| experiment. Buffett began serious investing when he was
| 10 years old. By the time he was 30 he had a net worth of
| $1 million, or $9.3 million adjusted for inflation.[16]
| What if he was a more normal person, spending his teens
| and 20s exploring the world and finding his passion, and
| by age 30 his net worth was, say, $25,000? And let's say
| he still went on to earn the extraordinary annual
| investment returns he's been able to generate (22%
| annually), but quit investing and retired at age 60 to
| play golf and spend time with his grandkids. What would a
| rough estimate of his net worth be today? Not $84.5
| billion. $11.9 million. 99.9% less than his actual net
| worth. Effectively all of Warren Buffett's financial
| success can be tied to the financial base he built in his
| pubescent years and the longevity he maintained in his
| geriatric years. His skill is investing, but his secret
| is time. That's how compounding works. Think of this
| another way. Buffett is the richest investor of all time.
| But he's not actually the greatest--at least not when
| measured by average annual returns._
|
| * https://www.goodreads.com/quotes/10551666-more-
| than-2-000-bo...
| gizajob wrote:
| To be fair to him, he does say time and time again
| "Invest in an S&P Index Fund"
| Galanwe wrote:
| There's more dimensions to an investment than average
| returns.
|
| Volatility adjusted returns (or Sharpe ratio) for instance,
| will tell you how much returns you have per unit of risk you
| take. This is important because getting 10% average annual
| returns with 10% annual volatility is worst than getting 5%
| returns with 1% annual volatility. You can only compare
| investments at equal amount of risk.
|
| An other factor to take into account is diversification. If
| you have an alternative investment to compare to your base,
| and it's average returns is lower than your base, but it is
| un correlated, then you actually get an increased volatility
| adjusted average returns by investing in both.
|
| That's just two dimensions to take into account, there are
| many others, but overall:
|
| - Don't compare investments based on annualized returns
| alone, it really doesn't make any sense.
|
| - Don't compare investments one against an other, instead
| look at the addivity of one on top of another.
| Karellen wrote:
| > getting 10% average annual returns with 10% annual
| volatility is worst than getting 5% returns with 1% annual
| volatility.
|
| Doesn't this depend on how long you're planning on
| investing for, and what your criteria for selling your
| investments are?
|
| If you're planning on investing for at least 10 years, and
| you're willing to give yourself a 2-3 year window for
| selling your investments once they reach a threshhold you
| decide on ahead of time, isn't the 10%/10% investment
| better?
|
| (e.g. if retirement is 20 years away, you might consider
| putting your funds in that sort of investment for 10 years,
| with a view to moving them to something less volatile in
| the 5 years after that, as soon as they cross a 10%
| annualised return threshhold during that window.)
| Galanwe wrote:
| > isn't the 10%/10% investment better?
|
| If you consider that "you don't know any better" and
| returns are normally distributed (i.e. you don't have
| some secret sauce nobody else knows about), then there is
| no dimension in which the 10/10 is better.
|
| You can convince yourself intuitively by imagining how
| you would maximize each strategy. The amount of money you
| have is a factor of the risk you take, because if you
| want to do something risky you will not be able to borrow
| much, whereas if you want to do something safe you can
| easily borrow.
|
| That is, you objective is to maximize your expected
| return, under the constraint of not breaking your risk
| limit.
|
| Suppose you have a 10% annualized volatility risk
| tolerance. That's your budget.
|
| If you invest it all in a 10% average return / 10% annual
| vol strategy, that's it.
|
| Now if I propose you a 5% average return / 1% volatility
| strategy, you just have to go to the bank and borrow 10x
| your capital. You will have the same risk exposure (in
| dollar), but 5x the expected returns.
| amanaplanacanal wrote:
| Until a black swan event bankrupts you because of the
| leverage you have taken on.
| hamilyon2 wrote:
| Is 10x borrowing even an option if we are talking
| retirement savings?
|
| I don't know much about finance. I guess that at that
| point (you borrowed 10 times your net worth). This is no
| longer your investment, it's your lender's investment.
| They will adjust interest rate to match the riskiness of
| whatever you are doing, leaving you with net zero.
|
| Borrowing money is not free.
| Galanwe wrote:
| > Is 10x borrowing even an option if we are talking
| retirement savings?
|
| Of course it is, though not exactly by "borrowing money"
| in a "mortgage" sense. Margin trading is a way to take
| leverage, derivatives is another. The former is simpler
| but costly, the latter is cheaper and allows you much
| more than 10x leverage, though it requires some high
| school mathematical thinking.
| alright2565 wrote:
| What you're saying sounds right. But in practice, no one
| is going to lend me, a nobody, 5x my money. At least
| outside real estate, that's it's own crazy alternate
| reality.
| Galanwe wrote:
| 5x leverage is nothing, most retail brokers will offer
| you much better future initial margins.
| Karellen wrote:
| > you just have to go to the bank and borrow 10x your
| capital.
|
| "just" is doing a lot of heavy lifting in that sentence.
| lotsofpulp wrote:
| > - Don't compare investments based on annualized returns
| alone, it really doesn't make any sense.
|
| >- Don't compare investments one against an other, instead
| look at the addivity of one on top of another.
|
| I don't think either of these matter to 90% of investors
| whose goal is to build up a nest egg for retirement which
| means not spending for decades in the future.
|
| Sharpe ratios and all those "risk" adjusted calculations
| all involve assumptions that may or may not be true.
|
| Comparisons of just annualized returns over long periods of
| time seems fine for broad market index funds, especially if
| you are assuming the federal US government will provide a
| backstop.
| Galanwe wrote:
| > Sharpe ratios and all those "risk" adjusted
| calculations all involve assumptions that may or may not
| be true.
|
| On the contrary, these risk adjusted measures assume
| nothing more than a normally distributed random variable.
|
| If you just look at annualized returns, then go ahead and
| invest in CDOs ETFs.
|
| More seriously, the S&P for instance has around 20%
| annualized vol, which IMHO is way above what you would
| want for a retirement fund. I would target something
| closer to 10%.
|
| > Comparisons of just annualized returns over long
| periods of time seems fine for broad market index funds
|
| Do you have any sort of reasoning or is it just a gut
| feeling?
| g15jv2dp wrote:
| > On the contrary, these risk adjusted measures assume
| nothing more than a normally distributed random variable.
|
| The financial sector isn't yet so unrelated to reality
| that the price of securities is random.
| Galanwe wrote:
| I think when stating your opinion against 40 years of
| econometrical research, including multiple Nobel prizes
| in economy, you should feel enticed to explain your
| opinion a bit more than "no I don't think so"...
| Maxatar wrote:
| This is absolutely absurd. Economists including Nobel
| prize winners, including even Eugene Fama who proposed
| the Efficient Market Hypothesis, does not think the stock
| market is normally distributed.
|
| At best, using a normal distribution is something that
| undergrads use as a tool to learn about the stock market
| and make some simplifying assumptions for pedagogical
| purposes, but it most certainly is not something that
| actual professionals or researchers in the field
| genuinely believe.
| lotsofpulp wrote:
| >On the contrary, these risk adjusted measures assume
| nothing more than a normally distributed random variable.
|
| That is exactly what I am referring to. For example, from
| Wikipedia:
|
| https://en.wikipedia.org/wiki/Sharpe_ratio
|
| >However, financial assets are often not normally
| distributed, so that standard deviation does not capture
| all aspects of risk. Ponzi schemes, for example, will
| have a high empirical Sharpe ratio until they fail.
| Similarly, a fund that sells low-strike put options will
| have a high empirical Sharpe ratio until one of those
| puts is exercised, creating a large loss. In both cases,
| the empirical standard deviation before failure gives no
| real indication of the size of the risk being run.
|
| >Do you have any sort of reasoning or is it just a gut
| feeling?
|
| The reasoning is that their volatility is negligible over
| the long term due to political forces. Of course, it is
| also an assumption that could be wrong, but the
| mechanisms for government policy (democracy, aging
| demographics, and voter participation trends) seem to
| favor reducing purchasing power of currency rather than
| letting broad market equity prices stall or slide down.
| Galanwe wrote:
| > >However, financial assets are often not normally
| distributed, so that standard deviation does not capture
| all aspects of risk
|
| Volatility not being a full measure of risk obviously
| does not imply that volatility should be ignored.
|
| The former statement about returns not being normally
| distributed is a, trivially verifiable, factual mistake.
| Daily stock returns are normally distributed with a
| slight positive kurtosis. This remains true on any period
| over the last 30 years.
|
| I am bot arguing either that the Sharpe is an all
| encompassing measure, some strategies have a returns
| distribution that is not well explained by Sharpe. I
| don't think it matters in this argument though.
| bumby wrote:
| > _assume nothing more than a normally distributed random
| variable_
|
| But look at something like systemic risk: it's not
| necessarily normally distributed. The S&P returns skew
| left. I'm sure there are other risk metrics that break
| this assumption as well.
| Galanwe wrote:
| Right, risk is often fat tailed, but unless we enter an
| expert discussion, for which HN is hardly a good medium,
| it is safe to assume 99% of strategies out there yield
| normally distributed returns. Non normally returned
| strategies are rarer and sophisticated.
| bumby wrote:
| > _it is safe to assume 99% of strategies out there yield
| normally distributed returns._
|
| I don't know that I agree. If the market as a whole
| doesn't have normally distributed risk, it implies even
| the simplest strategy of buying SPY and holding will also
| not have normally distributed risk.
| Maxatar wrote:
| The level of discussion that HN is a good medium for has
| absolutely no bearing or causal relationship with whether
| or not the actual stock market is normally distributed.
|
| Imagine really thinking that the nature of a discussion
| forum can somehow influence the distribution of stock
| prices, as if stock prices examine comments on the
| Internet to determine their behavior.
| personjerry wrote:
| > There's strong evidence no individual trader can expect to
| beat the market.
|
| I don't understand that. If you just bought Apple instead of
| SPY 20 years ago wouldn't you be doing great?
| desmosxxx wrote:
| You do know there are thousands of stocks right. how many
| people dump their entire savings into one stock. 20 years
| ago you wouldn't have known apple was going on to do so
| well. If people did know it would have been bid up in price
| at the time
| qwytw wrote:
| Which still means that SOME individual investors will
| inevitably beat the market.
| amanaplanacanal wrote:
| Some will, but there is no reliable way to tell which one
| in advance.
| ghaff wrote:
| And a lot of the Apple run-up happened relatively late in
| the game. Don't get me wrong. Apple--and what I was able
| to do with the money--was good to me. But so was a late
| 2010s Microsoft purchase and I don't think a lot of
| people are highlighting Microsoft as a stock they missed
| out on during the last 10 years.
| cowthulhu wrote:
| The key is that for every Apple, there are a ton of
| companies we don't even remember the names of that went out
| of business or otherwise did not beat the SP500.
|
| Put another way - if you can reliably pick the next Apple
| before anyone else, you should go work in finance and make
| tons of money.
| qwytw wrote:
| > Put another way - if you can reliably pick the next
| Apple before anyone else
|
| Problem is that it might take years to verify that.
|
| > The key is that
|
| That doesn't change the fact that there are plenty (in
| absolute numbers) of individual investors who
| consistently beat the market. Whether that's because of
| luck or something else is rather hard to tell.
| Marsymars wrote:
| > That doesn't change the fact that there are plenty (in
| absolute numbers) of individual investors who
| consistently beat the market. Whether that's because of
| luck or something else is rather hard to tell.
|
| It's actually not very hard to tell; if it was because of
| something other than luck, you'd expect that beating the
| market in the past would have some predictive value of
| their ability to beat the market in the future.
| satvikpendem wrote:
| It is on average, not from cherry picked examples.
| qwytw wrote:
| That claim is not phrased like that, so why would we
| interpret that way?
|
| > average
|
| So what? It's like saying that since an average person
| can't run a marathon it wouldn't make sense for any
| individual to even try it. How does that make sense?
|
| > cherry picked
|
| If we agree that 50% of all investors can't beat the
| market, what proportion can? 1%, 10%, 30%? Because there
| is a massive difference.
|
| How do we even define that group? Is it any random person
| buying random stocks with pocket change? Is it above a
| certain portfolio size? etc.
| StackRanker3000 wrote:
| You're missing the word "expect" in the original claim.
|
| You can beat the house at blackjack, but you can't
| reliably expect to do it.
| qwytw wrote:
| Investment is hardly a zero sum game. If it were nobody
| would make anything buy investing passively either. So
| how is that a reasonable analogy?
|
| > you can't reliably expect to do it.
|
| Sure, I can't. But assuming that it's not entirely random
| chance some proportion of people certainly can.
| StackRanker3000 wrote:
| > Investment is hardly a zero sum game. If it were nobody
| would make anything buy investing passively either. So
| how is that a reasonable analogy?
|
| I think you're reading too much into the analogy, which
| is maybe my fault for using an analogy. The point was
| just that it's not that you can't win, just that you very
| likely don't have an edge - not because it's
| mathematically impossible like in blackjack with a shoe
| that's continuously shuffled, but because it's so
| difficult.
|
| > Sure, I can't. But assuming that it's not entirely
| random chance some proportion of people certainly can.
|
| Yes, but the bar is very high.
| jltsiren wrote:
| "Average" is a bit misleading word when it comes to the
| market.
|
| If you're a top investing expert, you do things carefully
| in the right way, and you don't make mistakes, you can
| expect average performance. Because the market primarily
| consists of experts like you.
|
| Of course, investing is a random process, and you often
| beat the market by being lucky. But luck doesn't last
| indefinitely.
|
| There are basically two ways to beat the market
| consistently. One is trading based on information not
| available to the rest of the market. This is sometimes
| banned, because it makes the market less fair and less
| efficient. It can also be a crime. The other is finding a
| market that's small enough or obscure enough that it's
| not interesting to the professionals.
|
| But there is no investing stat that allows you to beat
| the market. Life is not an RPG.
| StackRanker3000 wrote:
| Individual traders beat the market all the time, it's not
| _impossible_. But you can't expect to do it reliably,
| because in practice it's essentially gambling, unless
| you're Warren Buffett, or those firms that utilize
| sophisticated quantitative or algorithmic trading.
|
| So for all intents and purposes, the takeaway for regular
| investors should be that they cannot expect to beat the
| market (but they can gamble on it if they like).
| ghaff wrote:
| Yeah. And 20 years ago, there was no iPhone and an only
| somewhat interesting MP3 player compared to other brands. I
| did OK with Apple but not suggesting it was much other than
| luck.
| qwytw wrote:
| > picking stocks yourself, the answer is also pretty cut and
| dry. There's strong evidence no individual trader can expect
| to beat the market.
|
| Is there? It would make sense if an average individual trader
| can't expect to beat the market. Claiming that there are no
| individual investors who did/can do that over a reasonably
| long period is both objectively false and rather absurd.
| hibikir wrote:
| Read the GP carefully.Expect to beat is very different than
| beat. You don't expect to beat the casino in roulette, but
| some people will luck out. That doesn't mean they could
| expect to win in advance: They should expect a small loss,
| depending on the table, and be surprised when luck smiles
| upon them.
| qwytw wrote:
| > You don't expect to beat the casino in roulette,
|
| Do you believe that investment is entirely random and
| there is absolutely no skill involved?
|
| Because if not, that's a nonsensical analogy. You should
| use a a both both luck and skill based game like poker
| (probably not the casino variety, though) etc.
|
| Otherwise if you can reasonably expect to beat 50% of all
| "players" (of course it takes much more time to verify
| that in the market) then you can expect to make more than
| the average.
| ryandrake wrote:
| > Do you believe that investment is entirely random and
| there is absolutely no skill involved?
|
| The skill involved is more just "best practices" that let
| you _match_ the market: Buy-and-hold, diversify,
| basically, do what the index funds do and you will be
| roughly +0 to the market. Beyond that, it 's a totally
| random distribution that adds between -X and +X which
| allows some participants to beat the market and causes
| some to underperform. You can't tell beforehand which
| participants will beat the market, even having full
| knowledge of their strategies and skill. If you think you
| can, please tell me which active funds will beat the
| market in the next 10 years based on their skills. I'll
| invest in them.
| qwytw wrote:
| > You can't tell beforehand which participants will beat
| the market, even having full knowledge of their
| strategies and skill
|
| I never implied that I can. That fact doesn't prove that
| it's somehow fundamentally impossible to do that. The
| problem is that it's impossible to tell if you "strategy"
| is working until a significant amount of time passes and
| by that point the markets conditions might have changed
| to such an extent that you don't longer have an edge (add
| to that the fact that it's hardly possible to determine
| what part of your success was luck/skill). So there is
| always a huge amount of uncertainty.
|
| Albeit if we look back by ~10-15 years it's rather
| obvious that it was possible to beat the market by a very
| significant e.g. there were clear rational reasons to
| believe that Nvidia would do better than its competitors
| like AMD or Intel and that there would be significant
| growth in GPU compute/ML/AI (of course accurately
| estimating the extent and exact timing but that wasn't
| necessary at all to get above market return) same applies
| to many companies in adjacent and unrelated sectors. Was
| I or the overwhelming majority of investors capable of
| realizing that and more importantly acting on it?
| Certainly not. But looking back it obviously wasn't
| random.
|
| The efficient-market hypothesis is clearly false, at
| least in the short to medium term. That in no way means
| that most investors are even remotely capable of
| utilizing this fact.
| ghaff wrote:
| It must have been nice in the early 2010s to be so smart
| to predict AI would be a huge hit (after a couple
| previous AI winters) and that GPUs would be the key and
| that NVIDIA specifically would reap the benefits. But I'm
| sure you're smarter than me and a lot of other people.
| And AMD also did pretty well during much of that same
| period although I sadly sold my modest holdings after
| they went nowhere for years after spiking with some
| adoption by the big server makers. It would probably have
| made more sense to bet on Intel during that period.
| stouset wrote:
| The problem is that any active trading strategies now
| need to beat the market by the cost of a fund manger, the
| cost of their research, the cost of regular trades, and
| the cost of short-term capital gains taxes on those
| trades.
|
| These add up _significantly_. Instead of having to beat
| the market at all, you have to beat it by an extra half
| of a percent or more every year. And you have to do it
| year after year after year.
|
| All the evidence shows that actively-managed funds are a
| weighted (against you) coin flip. Less than half will
| beat the market in a given year. And the results from any
| given year are independent of the next.
| jefftk wrote:
| We expect some individual traders to beat the market (and
| some to do much worse than the marker); that's variance.
| But each individual trader should not expect to beat the
| market, because they don't know if they're one of the lucky
| ones.
| qwytw wrote:
| > But each individual trader should not expect to beat
| the market
|
| In aggregate sure. But unless we believe that it's
| entirely random some individual investors can still
| certainly expect to beat the market, they just can't
| verify that in advance.
| stouset wrote:
| You're being pedantic in all the wrong ways.
|
| I offer you a bet. We flip a perfectly fair coin. On
| every heads you gain 10% on top of your bet. On every
| tails you lose 10%.
|
| It is fair to say that after 100 flips you may profit. If
| one million people play this game, someone almost
| certainly will. But you can _expect_ to lose money on
| this game. By the end, the average person will have about
| 60% of their original holdings (0.9^50 * 1.1^50).
|
| In this game it's possible for winners to exist. It's not
| even uncommon! You only have to get at least 53 out of
| 100 flips as heads. Unfortunately there's also no
| function that lets you determine a winner in advance, and
| the longer you play this game the greater the expected
| loss.
|
| _All_ of the available evidence shows that publicly-
| available actively-managed funds are essentially playing
| this game. As expected, many have incredible winning
| streaks... right until they don't.
|
| Yes, Ren Tech's Medallion Fund exists. But you can't
| contribute to it; they don't want your money. Because
| that requires scaling market inefficiencies and that in
| and of itself is an intractable problem. Novel strategies
| ripe for profit don't have unlimited capacity. They
| rapidly exhaust alpha.
| qwytw wrote:
| > You're being pedantic in all the wrong ways.
|
| No, I simply disagree with the whole premise, at least to
| a limited extent.
|
| > All of the available evidence shows that publicly-
| available actively-managed funds are essentially playing
| this game
|
| Yeah that's true, I was mostly talking about individual
| investors and/or non public funds.
| gbear605 wrote:
| That's not what "expect" means in statistics. If we're
| rolling 100-sided dice (each person rolls once), no
| person should expect to roll a 1, even though 1% of
| people will in practice roll a 1. Likewise, no one should
| expect to beat the market, even though many will in
| practice.
| qwytw wrote:
| > Likewise, no one should expect to beat the market, even
| though many will in practice.
|
| My only point is only that not every investor is rolling
| the same dice. It's just that it is effectively
| impossible to every verify whether you were rolling a
| 90-sided dice or a 100-sided one. It's rather clear that
| at least in the short to medium term (e.g 2-3 years) the
| stock is not even remotely perfectly efficient (that
| doesn't mean that the overwhelming majority of investors
| are somehow capable of utilizing that fact or that a
| significant proportion of those that did seemingly manage
| to do that weren't just lucky)
| asdasdsddd wrote:
| The catch 22 for active management is that if they are actually
| good then they would just use their strategies to manage their
| own money.
| throwaway3306a wrote:
| The catch 22 for this assumption is that they want to be
| richer than their own money would allow
| samus wrote:
| They probably do. They just make it their day job by selling
| their services to others as well.
| OJFord wrote:
| They do. But if you offer the service to other people, you
| get a lot more money to play with (meaning you can do more or
| different things than you could with less) and get to charge
| performance fees etc. in addition to your own capital gains.
|
| Really, you could say it about absolutely any job, it's just
| a bit more direct with managing money. 'If you were any good
| at writing software you would just sell your own SaaS', etc.
| asdasdsddd wrote:
| That's the common claim, but if you actually look at the
| successful funds that beat market year after year, their
| public fund is always the low yield, experimental
| strategies while the internal funds demolish the market.
| The reality is that most lucrative strategies have a yield
| cap and people who find them quickly surpass the cap so
| they just keep the strategies to themselves.
| throwaway2037 wrote:
| But why stress about beating the market? Just be the market
| with an ETF that tracks the S&P 500 index. Literally, setup
| auto invest from your paycheck. Go to sleep (Rip van Winkel
| style). Wake up 40 years later and retire comfortably.
|
| Look at total returns over the last 40 years on the most
| popular indices in the world. S&P 500 crushes them all. I see a
| lot of "Internet advice" recommending various MSCI world
| indices. They are all much worse than the S&P 500.
| theK wrote:
| Sometimes I wonder whether ETFs that track top valuation will
| lead to some weird stickyness and overvaluation in say,
| S&P500.
| rblatz wrote:
| I have the same thoughts. Eventually there will be a lot of
| money to be made breaking the s&p 500.
| throwaway2037 wrote:
| Can you explain the "breaking" trade? And why haven't we
| seen more written about it?
| cess11 wrote:
| Not sure what they mean specifically but you've probably
| seen a lot written about it, in terms of BRICS, the
| petrodollar, ARM in China, subsidies on electric cars,
| and so on.
|
| Personally I try to avoid investing in the US for
| political reasons, besides the wishful expectation that
| the empire could fall within my lifetime and hence be a
| not so good investment.
| rblatz wrote:
| Think of when George Soros broke The Bank of England for
| an example of the type of trade.
|
| There is a lot of demand for S&P 500 index , but that
| demand isn't exactly tied to the fundamentals of the
| index, and the price isn't tied to value of the
| underlying companies, it's tied to demand of people
| looking to save money for retirement or a place to store
| a nest egg. This is an opportunity for price discovery to
| get things wrong and eventually the market should correct
| that.
|
| https://www.investopedia.com/ask/answers/08/george-soros-
| ban...
| wcoenen wrote:
| Picking the S&P500 over a world index because you think it
| will outperform, has the same problem as picking individual
| stocks over an index. You can't actually know which will
| outperform in the future.
| bluGill wrote:
| You don't need to be the best, just do well.
| throwaway2037 wrote:
| Over 40% of revenues from S&P 500 companies come from
| overseas. That is world enough for me.
| OJFord wrote:
| Or, where in the world do you need to spend your money?
|
| I live in the UK: if I buy the S&P500 over the FTSE100 (or
| even more so the 250, the next 250 largest companies which
| are typically more UK-market-oriented) I'm making a US-
| weighted bet. But maybe I think I'll move there, and
| _should_ have that exposure. Or maybe I spend a lot of
| money all over the world and want a more global exposure
| overall.
|
| I think at least vast majority index is right for basically
| everybody, but you do still need to think about which
| index/indices are most applicable to your
| situation/intentions.
| rsynnott wrote:
| World indexes are normally somewhat less volatile (they're
| typically _much bigger_; MSCI World is 1400 companies, and
| MSCI ACWI nearly 3000), which may be a useful attribute,
| depending on what you're going for.
|
| (Conversely, there are smaller indexes which tend to beat the
| S&P500, like the NASDAQ100, but there's a volatility cost.)
| wenc wrote:
| The common refrain is that "time in the market always beats
| timing the market".
|
| The implicit assumption in that refrain is that, despite
| periodic dips, the U.S. stock market always goes up over time.
| This has been true since the Great Depression (see graph of S&P
| 500 since 1929)
|
| https://www.officialdata.org/us/stocks/s-p-500/1929
|
| The implicit assumption behind _that_ is that the American
| economy always invents a way to grow. Buffet famously said,
| "never bet against America".
|
| For as long as these assumptions match reality, it's likely
| that passive management will continue to succeed.
| gizajob wrote:
| It's also just capitalism and fiat currency - in a world
| where the money supply _has_ to inflate, the prices in the
| market have to go along with it.
| 317070 wrote:
| That is too strong of a condition. The economy doesn't need
| to grow for passive investing to work.
|
| Even when the economy is flat, passive management works. As
| long as companies are economically productive, capitalism
| will hand over a chunk of the profits to the owners of the
| capital.
|
| Of course, growth increases the size of that chunk year over
| year, but capitalism doesn't stop when growth stops.
|
| Active investing is when you are looking to exceed this
| passive margin by timing your trades well. Active investing
| requires changes in productivity (such as growth).
| kjksf wrote:
| Returns from stock investing come from increasing stock
| prices.
|
| Stock prices increase when earnings of the company grow.
|
| In other words: when the economy grows.
|
| You can argue that Amazon and Apple and Google and Facebook
| etc. will grow earnings even if the overall economy is flat
| or shrinks but I don't see how that would apply to passive
| investing i.e. investing in S&P 500 i.e. investing in 500
| largest US companies.
|
| S&P 500 is U.S. economy and they all are sensitive to
| overall economic situation. If people have less money, they
| buy less stuff. Amazon makes less money, their stock goes
| down. Apple sells less iPhones, their stock goes down. All
| other companies make less money, they spend less on
| advertising, Google and Facebook make less money.
|
| I don't see a scenario where overall U.S. (or world)
| economy declines and S&P 500 doesn't decline.
|
| In fact, declining economy is an argument for active
| investing. Even when overall economy declines, among 6000
| companies listed on stock market there will be some that
| will be growing and if you invest in them, you'll make
| money.
| 317070 wrote:
| > Returns from stock investing come from increasing stock
| prices.
|
| There are other ways to make returns. Return from stock
| comes mainly from increasing stock prices and from
| dividends. But fundamentally, it comes from profits.
|
| > Stock prices increase when earnings of the company
| grow.
|
| There are many reasons stock prices increase. But whether
| it does or doesn't isn't really relevant.
|
| When a company makes a profit, either:
|
| * the profit is reinvested, the value of the company
| grows and the stock price grows, making a return for the
| passive investor
|
| * the profit is returned as dividends, making the passive
| investor a return as well.
|
| No growth needed for the individual companies either. As
| long as they are profitable, they make a steady return
| for the passive investor.
|
| Thought experiment: imagine a company which is going to
| make 1 dollar of profit per year for all eternity, which
| it returns as dividends. For an investor with a discount
| rate of 95%, that company is worth 20 dollars. Say he
| buys the company for 20 dollars. After 10 years, that
| company is still worth 20 dollars, as eternity is still
| eternity, but the passive investor owning the company has
| made 10 dollars from the company.
|
| As you can see, the passive investor made a return,
| despite the company only being profitable, but not
| growing nor shrinking.
|
| You will make a return on your investment when your
| investment makes a profit, that is capitalism. Whether
| the profit is increasing, decreasing, flat or going in
| circles does not really matter, as long as it is a profit
| and not a loss.
| stkdump wrote:
| This is all correct, but missing the higher order. Most
| investors will not take out the dividends, but reinvest
| them. A few might sell, because they are in retirement.
| But assuming that the retired people make up a small part
| of investors, profit is reinvested. Further, people
| invest a percentage of their income for retirement. All
| that means that work income and dividends make the stock
| prices go up and retirement makes the stock prices go
| down. You could say that retired people consume and help
| companies make profit, but it is actually worse for stock
| prices than investment, because the consumption requires
| companies to sell products and services that come with
| cost.
| cess11 wrote:
| For me returns on personal investment in stocks, funds
| and ETF:s consist largely of dividends.
| qwytw wrote:
| > time in the market always beats timing the market > The
| implicit assumption in that refrain is that,
|
| Only if you were fine with waiting 50-100 years. The market
| in 1950 was more or less at the same level in real terms as
| in 1906, of course dividends were way higher back in those
| days. If we take that into:
|
| e.g. if you invested 200$ in S&P 500 in 1906 adjusted by
| inflation in 1950 you would have had ~$1570 in 1950. Which is
| an average annual return of ~4.7% which is not terrible but
| you would have made approximately the same by buying high
| grade corporate bonds just with way less volatility.
| jackcosgrove wrote:
| > American economy always invents a way to grow
|
| There are various macroeconomic models which attempt to
| explain the factors of growth, for example the Solow growth
| model. In this model technological advancement is only one of
| three factors. The others are the savings rate and the
| population growth rate.
|
| According to this model, you may not be able to innovate your
| way to growth if one or both of the other factors are
| contrary to growth. This may sound academic but there are
| concrete examples in the last twenty years of countries that
| have not grown because of a stagnant or shrinking working age
| population, e.g. Japan and Italy.
|
| This has no bearing on the passive vs active debate, as I'm
| fairly confident that passive investing will always be the
| better strategy for a retail investor regardless of the
| growth potential of an economy.
|
| It's just in a country with unfavorable macroeconomic
| conditions, passive investing may be the way to minimize
| losses rather than maximize gains.
|
| The assumption of continued growth will probably hold true
| for the American economy through the end of the century at
| least, so for everyone here investing in US equities it is
| academic. But we can try to decompose an economy into factors
| and use those to check whether we expect growth to occur at
| all.
| throw0101d wrote:
| > _The implicit assumption behind that is that the American
| economy always invents a way to grow. Buffet famously said,
| "never bet against America"._
|
| Or you invest in a total world market fund for better
| diversification.
|
| Diversification would have helped anyone in Japan(-only) in
| 1990, and anyone in the US(-only) in the 2000s. It's a very
| easy strategy nowadays:
|
| * https://investor.vanguard.com/investment-
| products/etfs/profi...
|
| * https://www.vanguardinvestor.co.uk/investments/vanguard-
| ftse...
|
| * https://www.vanguard.ca/en/advisor/products/products-
| group/e...
| immibis wrote:
| And the assumption that the stock market will go up from now
| is itself a form of timing the market. It assumes that now is
| the best buying opportunity in the whole future. I don't like
| that refrain.
| acchow wrote:
| The general wisdom is that it's basically impossible for most
| people to tell the good fund managers from the bad/mediocre
| ones.
|
| Except Warren buffet. A lot of people went with Berkshire
| Hathaway and did very well.
| throw0101d wrote:
| > _Except Warren buffet. A lot of people went with Berkshire
| Hathaway and did very well._
|
| Buffett has been underperforming the S&P 500 for about twenty
| years now:
|
| * https://www.linkedin.com/pulse/warren-buffett-has-
| underperfo...
|
| * https://news.ycombinator.com/item?id=37827101
| danielmarkbruce wrote:
| It's sort of self evident - if you are freakishly capable of
| spotting mispriced securities in a market full of smart hard
| working people who are paying attention, you can do better than
| average. If you aren't freakishly capable... you cant.
|
| It's sort of like "does playing pro golf make sense?".
| bumby wrote:
| There's an interesting corollary to this. There's some
| evidence that low-volatility strategies can outperform, at
| least when not using leverage. My working theory is that it
| is due to an overconfidence bias. People who actively trade
| assume they can pick better stocks, or else they wouldn't
| trade. This manifested in more volume in high-beta stocks,
| leaving low beta stocks undervalued.
| gizajob wrote:
| They're only mispriced until they're not though, or they're
| priced well until they're suddenly mispriced. That is the say
| the market is an evolving system varying on the time axis -
| that things are mispriced assumes that time isn't rolling
| along and new events don't happen and new information doesn't
| arrive. Everything's price today is just a guesstimate until
| tomorrow's guesstimate following some new data. Granted it's
| not like the past where whole companies were sitting there
| underappreciated because of a lack of analytics, but at the
| same time coming out of covid companies like Rolls Royce
| (makes aircraft engines) had their prices crash completely,
| then were demonstrably "mispriced" for ages and are still
| recovering now air travel is back to 2019 levels. But the
| price wasn't mispriced when the planes weren't flying, just
| cheap to those who believed covid would get sorted eventually
| and the debt RR took on to survive would get repaid.
| danielmarkbruce wrote:
| The fact they are mispriced then not mispriced at a later
| time is almost the entirety of the reason one has the
| potential to make better than average returns.
| llelouch wrote:
| Active does better much better. If you know how the price moves
| you can easily beat the market.
| abbadadda wrote:
| Source?
| taraparo wrote:
| It is the opposite. Market timing does not work reliably.
| Active management produces worse results on the long run. no
| individual trader or active manager can consistently beat the
| market. however active fonds may have periods (even several
| years) where they out perform.
|
| for private investors buy-and-hold of highly distributed ETFs
| is the best way to do it. The easiest way to get started is a
| one ETF portfolio like e. g. Vanguard FTSE All World or SPDR
| MSCI ACWI IMI. They perform internal rebalancing automatically
| and you virtually have nothing to do. buy them and don't look
| at them for the next 20 years.
| TrainedMonkey wrote:
| Noting that it is possible to beat market, with strategies /
| algorithms that are generally non-public. For example
| medallion fund, see https://posts.voronoiapp.com/markets/Jim-
| Simons-Medallion-Fu... . Note that these crazy performance
| stats are after the steep fixed + performance fees.
| amanaplanacanal wrote:
| Strangely, the other funds operated by the same company and
| actually open to outside investors, have not performed as
| well. It is unexplained exactly why.
| benrapscallion wrote:
| Acquired.fm has a great episode on RenTec medallion fund
| vs their institutional funds.
|
| 'David: The way that some folks we talked to described
| the difference between the institutional funds and
| Medallion to us is that Medallion's average hold time for
| their trades and positions is (call it) a day, maybe a
| day-and-a-half. Whereas the average hold time for the
| institutional funds positions is a couple of months.'
| mikeyouse wrote:
| From some of their legal settlements it seems a not
| insignificant part of their advantage is dreaming up
| obscure illegal tax dodges on short term capital gains
| that are later revealed as such to keep more funds
| invested.
|
| https://www.moomoo.com/news/post/5891516/the-biggest-tax-
| eva...
| pfortuny wrote:
| Yep. Statistically, there must be some outlier. Always.
| And... good luck having the data they use to trade and the
| money to just enter into the markets they participate in.
| ryandrake wrote:
| It's possible only in the sense that it is _possible_ to
| flip a coin heads 10 times in a row. One out of 1024 should
| do it. But you don't know which one will until the
| experiment is over and you look back at the results.
| hindsightbias wrote:
| Fund was up to $55B in 2022, but they made him take a roomie
|
| https://thenevadaindependent.com/article/lawmakers-approve-d...
| nxobject wrote:
| Oh, that's funny... apparently to reduce the risk of there just
| being one person.
| Cthulhu_ wrote:
| Which is fair, see https://en.wikipedia.org/wiki/Bus_factor
| djkivi wrote:
| Fidelity: Successful investors forget they have an account:
|
| https://www.bogleheads.org/forum/viewtopic.php?t=146347
| BurningFrog wrote:
| That's pretty much how I did it.
|
| I didn't actually forget, of course, but I didn't get around to
| looking at the numbers every year. And when I did, I hardly
| ever changed anything.
|
| Of course, buying Apple in 1997 was also an important factor.
| heresie-dabord wrote:
| > Of course, buying Apple in 1997 was also an important
| factor.
|
| Had the fare, boarded the right train at the right time.
| geodel wrote:
| Funny. Just today I receive main from Fidelity to review my
| account. The only thing I wish to but can't afford to change is
| retirement age to an earlier date.
| pants2 wrote:
| In crypto, successful investors get their funds stolen and then
| later recovered (MtGox, Gemini Earn)
| cm2187 wrote:
| Or go to jail and only get to sell on their release
| AuryGlenz wrote:
| Mine were just stolen by the government and not given back.
| Btc-e.
|
| I'm not bitter or anything.
| kalium-xyz wrote:
| Heh i had this with bittrex
| Mistletoe wrote:
| Those are the lucky ones that get paid back in kind in the
| crypto currency they had. Some like the FTX folks are
| unfortunately paid in the dollar value of their account at
| the time.
|
| Bitcoin was like 15-20k at the time of the FTX collapse and
| is now 60k again like the highs in 2021.
| blcknight wrote:
| Until it gets liquidated and the cash put into state lost money
| accounts because of escheatment rules. You should still login
| once a quarter or so.
|
| https://www.investopedia.com/ask/answers/110415/what-are-dor...
| Mathnerd314 wrote:
| > The dormancy period for IRAs cannot begin until the account
| owner reaches the age at which one must begin taking required
| minimum distributions. As of 2023, the required minimum
| distribution age is 73.
|
| So not until you retire.
| recursive wrote:
| I've been harboring a suspicion for several years that I've
| forgotten an account or two. Maybe I'm one of the fidelity
| investors.
| TeMPOraL wrote:
| Subscription fatigue.
|
| I sometimes worry if I have a forgotten paid subscription on
| an e-mail of mine I don't check, that slowly drains a bank
| account I forgot I have. There's just Too Many Accounts, and
| Too Many Subscriptions.
| ghaff wrote:
| That's the thing with subscriptions. The default is just to
| let them continue to leak. I've periodically discovered
| subscriptions that presumably resulted from me not
| explicitly _not_ checking a box somewhere,
| throw0101d wrote:
| Your link has John O'Shaughnessy being interviewed by Barry
| Ritholtz (two respected folks in finance), and O'Shaughnessy
| later corrected himself:
|
| *
| https://twitter.com/jposhaughnessy/status/115517108366392524...
|
| While I do believe set-and-forget passive investing is best for
| the vast majority of people, last time I checked that Fidelity
| study does not actually exist, and the story is apocryphal (no
| one seems to be able to actually link to it).
|
| If you ask Fidelity about it, they'll tell you it does not
| exist:
|
| * https://www.morningstar.com/columns/rekenthaler-
| report/archi...
| djkivi wrote:
| Thank you.
|
| There are too many of these apocryphal stories out there of
| various kinds. Sorry that this one appears to be too.
| AlbertCory wrote:
| > "Doing nothing is harder than it looks"
|
| He means that when people are screaming at you to _do something_
| because the market 's tanking, you earn your salary by yawning
| and saying, "No, I think we're good."
| dclowd9901 wrote:
| Reminds me of that scene in The Long Short where Michael Burry
| is hemorrhaging money on the bet against CDSes and basically
| everyone has completely turned on him.
| jbs789 wrote:
| *The Big Short, for anyone curious.
| sameerds wrote:
| Completely off-topic. The article is paywalled, and for once I
| decided to go down the subscription rabbit hole. I am viewing
| this in Firefox on Windows. But every "subscribe" button on the
| WSJ page points to an Apple store page for the "app". WTF?!
| rty32 wrote:
| Unfortunately Firefox is often treated as a forgotten child.
|
| I say this as a mostly Firefox user on every platform. When the
| Firefox experience sucks too much, I switch to Chrome or
| Samsung Internet.
|
| (Well, Firefox itself has a number of open bugs that haven't
| been fixed for a long time)
| thevillagechief wrote:
| It was Richard Thaler's Misbehaving: The Making of Behavioral
| Economics book that finally broke through my thick, anxiety
| ridden skull and convinced me to stop reading economic news
| everyday and just forget the the retirement accounts existed. If
| I'd read that book earlier, I'd be up 3X on my positions.
| ChrisMarshallNY wrote:
| I haven't touched my 401(K) in over 30 years. It's done 9-20%
| per year. It's not super aggressive, but will take a hit, on
| really bad markets (the only year it actually lost money, was
| 2020 -and it has completely made up for that. It even made some
| money in 2008).
|
| I ignore the Fidelity calls. Every time a new broker rotates
| in, they try to get me to move my money around.
| benrapscallion wrote:
| Is it invested in an index fund?
| ChrisMarshallNY wrote:
| Yes.
|
| I contributed 50% to a bond fund, as well, but that is
| like, 10% of the total, nowadays.
| lkdfjlkdfjlg wrote:
| > I contributed 50% to a bond fund, as well, but that is
| like, 10% of the total, nowadays.
|
| That's one of the ridiculous aspects of fixed-percentage
| allocations: by constructions those allocations tell you
| that you should get rid of the things that are making you
| the most money, and put it into the things which are
| underperforming instead. (I get that you didn't do that,
| I'm just got reminded of it.)
| dralley wrote:
| I've done well (39% annual returns) investing in 2-3 individual
| stocks in addition to index funds for the rest of my
| investments. More than that would be IMO too much to pay
| attention to.
|
| Admittedly my choices for stocks are a bit on the high-risk
| side, but it's worked out well so far. Picking up lots of AMD
| in 2017, and Rivian 6 weeks ago, seems to have been decent
| calls.
| zeroonetwothree wrote:
| Sorry but I never believe these online claims given with no
| evidence about ridiculously high returns. It's not to say you
| are lying but it's easy to miscalculate these things.
| ghaff wrote:
| Yeah, I've done quite well with a few specific (tech)
| stocks that were reasonable picks (and some modest bets
| that were simply wrong). (Which I mostly funneled into a
| charitable trust that pays an annuity.) But I certainly
| wouldn't put all my money or even most of it on such a bet.
| Even if I think I have a better insight than John Q. Public
| into something, there are so many variables.
| BeetleB wrote:
| He's talking about 7 years. Lots of people do very very
| well on short timeframes. They usually balance out in the
| long run.
| dralley wrote:
| I bought into AMD stock when it was $10 per share, it's
| now $180, yes it's a bit lucky but I'm not bullshitting.
|
| It seemed quite logical to me at the time that they would
| do well. This was right as Intel was being savaged by
| Meltdown and the performance hits of the mitigations and
| Zen 1 was successful.
| wingworks wrote:
| But will you sell in time for all that growth to not be
| eroded away? Tech has been doing really well last few
| years, but it won't last forever looking at history. So
| when do you sell, and what do you buy when you sell.
|
| This is why people opt for low fee index funds, like a
| total stock market fund. It'll always be in the right
| companies.
| Cthulhu_ wrote:
| Anecdotally I can confirm there's been a few 40% years in
| the past decade, but it really is a gamble, and because of
| survivorship bias it's easy to only hear about the ones
| that gained and not the ones that lost.
| wingworks wrote:
| I started my investing journey about 5 years ago, started
| with stock picking, and my average yearly return is...
| 4.5% p.a. I would've 100% been better of investing in a
| low fee index fund, like S&P500 (VOO), or even just a
| world ETF like VT.
|
| I picked some winners, like Microsoft / Google, both up
| 150%, but they're tiny fraction of my total portfolio, so
| hardly returned anything all counted up. I did 170% at
| one point with Tesla too, but didn't sell at the peak. So
| ended up with 4.4%p.a. over 5 years.
|
| Save to say I don't stock pick anymore and just buy VTI
| (kinda like VOO) and some VT.
| gizajob wrote:
| You could have doubled your money on Nvidia since January??
| Look at the charts for all the evidence you need. There's
| survivorship bias in all the claims but it's easily done
| for the survivors.
| bobsmooth wrote:
| I 10x with NVDA, but I got lucky. It's like winning the
| lottery.
| ghaff wrote:
| Great read. I actually recommend it over Nudge. I had him as a
| professor at Cornell for a couple courses before "behavioral
| economics" was a term.
| EVa5I7bHFq9mnYK wrote:
| It depends. I had a pension plan that grew x2 in 17 years
| (don't know what they invested into). My own investments grew
| much faster than S&P though.
| rr808 wrote:
| In general avoiding fees is definitely a good thing. Its one of
| those things that hindsight finds the best strategy and they were
| kinda lucky about the crazy bull market in the USA in this time.
|
| If you were a Pension fund in France, Australia, UK, Japan, China
| etc and put all your money in the local passive index tracker
| you'd maybe double your money in the last 20 years but way under
| perform S&P which is like 6x in that period.
| immibis wrote:
| This is true. Of course, when you have many indices, with
| random returns, some of them will perform well, but past
| performance doesn't guarantee future results.
| emacdona wrote:
| To any fund manager out there that truly believes you can beat
| the market, here is how you can sell me your fund:
|
| We agree on an index and a time frame. You guarantee me the same
| return as the index within that time frame. If you beat the
| index, you keep 90% of returns ABOVE the index (and I get 10%).
| We both win, and you win big.
|
| If you don't beat the index (within the time frame), you make up
| the difference (so I get the return to the index).
| jppittma wrote:
| I feel like some creative use of beta could make this a very
| lucrative deal for a patient, but unscrupulous fund manager.
| Findeton wrote:
| Fundsmith for example has beaten the market for a long time
| (not this year though). I can also mention another Spanish fund
| that I know: Tercio Capital.
|
| https://markets.ft.com/data/funds/tearsheet/charts?s=GB00B4Q...
| https://www.finect.com/fondos-inversion/ES0174115057-Cinvest...
| cjblomqvist wrote:
| There are some research (instead of cherry
| picking/anecdotes). I don't have any links right now but
| basically half of the funds lose compared to the index (by
| law of nature - averages and all that). Furthermore, taking
| fees into account, just a few percentages make anything more
| (over time) - which is probably within scope of randomness.
| Findeton wrote:
| In general hard working prudent value investors are able to
| beat the index. It's just that those are very few. I mean
| Buffet has done it for half a century, that's not a
| coincidence.
| p_j_w wrote:
| Given the statistics and number of investors involved, it
| seems like an absolute certainty that a few people would
| beat the index for the entirety of their lives simply by
| chance.
| Findeton wrote:
| Yes some people might do it by chance. Some other people,
| they do it by knowledge.
| sdenton4 wrote:
| Find me the one who knows they got there by chance
| alone...
|
| It's very easy to create a narrative around random
| movements. I expect that anyone who is ahead of the
| market creates such a narrative, and declare themselves a
| genius. And then half of the geniuses underperform each
| year, same as every year...
| cjblomqvist wrote:
| Half will beat index by definition. The key is to beat it
| including the cost of beating - and we've also seen that
| the extra value have generally been captured by the fund
| managers - not the fund buyers.
| abound wrote:
| An important component of a bet like this: you should base the
| win/lose calculation on returns _after accounting for fees_.
| The index fund likely has fees that are two orders of magnitude
| lower than the active fund. Otherwise, a random fund may beat a
| broad index just by chance.
|
| Warren Buffett's very similar bet was done this way.
| Scarblac wrote:
| You won't have any guarantee that they will be able to make
| good on their promise and won't just go bankrupt.
| bandyaboot wrote:
| You're probably aware that no fund manager would accept your
| offer. But it doesn't prove that they don't think they can beat
| the market (as misguided as that belief might be), it just
| means they're not willing to take on an absurd amount of risk
| to prove it.
| cjblomqvist wrote:
| Exactly. No point being the one taking the risk - if the
| professionals don't dare take the risk then any non-
| professional (fund buyer) shouldn't either (under normal
| circumstances).
|
| PS. Furthermore, an accurate comparison is not beating the
| index, it's beating it enough to cover the
| salary/compensation of the fund manager + some (with less
| risk! Risk = cost!)
| bandyaboot wrote:
| Well I think many fund managers regularly take on risk to
| achieve higher returns. They just won't take on 100%
| downside risk while being taxed 10% on the upside.
| emacdona wrote:
| I think this gets at a deeper point I'm trying to make.
|
| If you truly can consistently beat the market, you are
| already making a killing with your _own_ money.
|
| If you want to use _my_ money to place your bets
| (presumably b/c you want to leverage your market beating
| ability), I want a guarantee (because I'm more than happy
| to take the return of the index).
| DistractionRect wrote:
| I follow, essentially you're viewing it like a loan +
| interest + a minor stake in the venture. If the venture
| fails, you still expect to repaid loan + interest and
| your stake in the venture is worth $0.
|
| Unfortunately no one will agree to this as long as
| everyone else is willing to invest _and_ shoulder the
| risk
| ImPostingOnHN wrote:
| It sounds like they're simply critically evaluating the
| claims of beating the market.
|
| If you can't beat the market with your own money, you
| shouldn't be trying to do it with someone else's.
|
| If you _can_ beat the market with your own money, why are
| you so worried about the downside? There should be little
| risk for someone who claims to be able to beat the
| market.
|
| If they say that's too much risk, they likely don't think
| they can consistently beat the market.
| jancsika wrote:
| You've just found a way to restate "they don't truly
| believe they can (consistently) beat the market."
|
| On the flip side-- a passive fund manager _would_ take
| 100% downside risk of the fund failing to properly track
| the index, and only in return for a modest fee. Stated
| differently-- passive funds can and do consistently track
| the market.
| dullcrisp wrote:
| That's fair. I'd do it for just 1% of the upside.
| Maxatar wrote:
| That's right, fund managers expect their clients to take
| 100% of the downside risk and tax their clients 20% on
| the up side.
|
| Where I disagree with you is that fund managers regularly
| take risk. They never take risk themselves, rather they
| supply all of the risk to their clients.
| emacdona wrote:
| I don't think the risk is "absurd". Or, at least it's no
| different than the risk they ask any investor to take by
| charging them 1% of their portfolio for it to be "actively
| managed".
|
| Plus, they are being compensated. I'm offering 90% of the
| returns above the index :-)
| stouset wrote:
| Exactly.
|
| Active funds ask investors to accept 100% of the downside
| and get taxed on the upside. Actually it's worse: they're
| taxed on _both_ the up and down sides.
|
| If this is a terrible deal for fund managers then virtually
| by definition actively-managed funds are a terrible deal
| for investors.
| joe_the_user wrote:
| The risk your (completely hypothetical) offer would involve
| is reputational. There's no reason for a funds manager to
| ever risk their reputation on your stunt since they are
| constantly risking money and reputation in the ways that
| they control. Indeed, one could almost certainly put
| together a bet similar to yours using derivatives and have
| the potential upsides and downsides without the
| reputational damage.
|
| Of course, if you offered your bet to all comers and gave
| significant publicity, unknown "funds managers" would be
| happy to take you up, though they might well default if
| they lost.
| mort96 wrote:
| I mean it does mean that they don't have faith in their
| ability to beat the market on average across significant time
| spans.
| KptMarchewa wrote:
| Or, it's just that risk management isn't about faith.
| mort96 wrote:
| In my eyes, "we have sincere faith in our ability to
| sustain higher-than-market returns on average" and "our
| risk management calculations tell us that we will have
| beat the market on average with very high probability"
| are the same statement.
| the_cat_kittles wrote:
| it points out the inherrent bullshit to the current
| arrangement
| hhmc wrote:
| Why would anyone take the other side of this bet? It's an
| incredible financial instrument, that anyone on the buyside
| would buy in an instant (as formulated -- ignored fees/tcosts
| etc).
| stavros wrote:
| If I can consistently make more than 10% on your money, I'll
| take the other side.
| hhmc wrote:
| If you can consistently make more than 10% you don't need
| to hamstring yourself with this terrible deal, you can just
| get investment on typical terms.
| stavros wrote:
| If I can consistently make 30%, this terrible deal will
| make me 20%, whereas the typical terms of management fees
| will make me 5%.
| swexbe wrote:
| If you can consistently make 30%, a bank loan will make
| you 24%.
| stavros wrote:
| Fair point. I don't know why BlackRock did it, then.
| stouset wrote:
| > Why would anyone take the other side of this bet?
|
| People accept this bet every single day... when they buy
| actively-managed funds.
|
| Actually they accept a worse bet. Instead of taking 100%
| downside risk and being taxed on anything above the index,
| they're taxed on both gains and losses.
|
| You're right that it's an incredible financial instrument.
| Actively-managed funds are extremely profitable... for fund
| managers, who get paid out of investors' assets in bad years
| and also get to skim off the gains in good years.
| paxys wrote:
| Where will they find the money to pay you if they lose?
| cess11 wrote:
| If they don't they'll enter bankruptcy proceedings and their
| assets get sold and divided between creditors.
| otoburb wrote:
| Sounds similar to recently launched buffer ETF products,
| specifically BlackRock and Innovator that hedge 100% of
| downside while capping your upside across different time
| horizons indexed to the S&P500.[1]
|
| [1]
| https://www.bloomberg.com/news/articles/2024-07-01/blackrock...
| dmurray wrote:
| They don't guarantee you zero downside compared to investing
| in the index, though, but compared to putting your money
| under the mattress.
|
| It's relatively easy to achieve a return profile like these
| promise with some combination of Treasuries and index options
| (at least while Treasuries pay 5%!), and the ETFs are doing
| this kind of financial engineering rather than promising to
| beat the market through stock-picking skill.
| ProjectArcturis wrote:
| The point of actively managed funds is not so much to "beat the
| market", it's to provide diversified returns via strategies
| that are uncorrelated with the market.
|
| On average, the S&P500 has returned about 7% annually. If I had
| a strategy that returned 5% on average but was totally
| uncorrelated with the S&P, then you'd get the best overall
| long-term returns (maximize the geometric average of annual
| returns) by investing in a combination of my strategy and the
| S&P.
| dv_dt wrote:
| Well then you could establish a simiar pay critera that beats
| the s&p 500 during recessionary moves of the index. Im
| guessing you wouldn't get many takers
| trpotter72 wrote:
| Uncorrelated returns is the key here, not inverse.
| dv_dt wrote:
| So how would you quantify non-correlation? I mentioned
| recession events because thats a significant movement
| when you most want to avoid correlation.
| daedrdev wrote:
| My impression though i that most of these firms are highly
| correlated with the market despite their attempts at
| otherwise
| dukeofdoom wrote:
| Is the 7% post inflation?
| darkwizard42 wrote:
| No, it is likely the rate of return. There is generally no
| such mention of inflation in investment returns. The
| alternative to investing your dollar is to put it in a
| treasury (inflation tracked), so you can compare the value
| of your money against that as the lowest risk (the US
| defaulting) vs. other forms of risk.
| bityard wrote:
| No need for "likely," it's easy to look up:
| https://www.nerdwallet.com/article/investing/average-
| stock-m...
|
| The average return of the S&P 500 is around 10%, although
| you will see people use 7% as a shortcut to account for
| inflation when estimating the future value of their
| portfolios.
| bityard wrote:
| I want to agree with you, except that almost all of the
| salescritters for these products promote them as "beating the
| market." They _have_ to sell them this way because if their
| customers had any idea what the whole-market returns actually
| were, they wouldn't pay extra for the privilege of a far
| riskier (and lower-performing, on average) investment.
|
| And the S&P 500 returns more like 10% per year. A bit higher
| if you cherry-pick your start and stop dates. I've only seen
| people use 7% for portfolio value estimation purposes, after
| adjusting for an assumed 3% inflation.
| HFguy wrote:
| SP500 had not returned 10% a year historically. And really
| would want to look at returns above the cash rate.
|
| And the SP500 has had unusually good performance relative
| to other equity indexes. Would not count on that forever.
| Maxatar wrote:
| This is a kind of revisionism that mostly took off after
| Warren Buffet won his bet that hedge funds would not
| outperform the market over a 10 year time period.
|
| The original goal and selling point of hedge funds was to
| produce consistent results regardless of the market's
| performance by using long and short positions to provide
| absolute returns in any market environment.
|
| With that said, even if you accept the revisionism, it's
| untrue that actively managed funds are uncorrelated with the
| market. What is true is that selection bias makes it seem
| like they are since when interest rates rise and markets go
| through a down swing, the majority (and yes I mean more than
| 50%) of hedge funds go out of business. As such the only
| hedge funds that remain are the ones that happened to weather
| the storm so to speak.
| pipes wrote:
| I find this really hard to believe. I could be wrong but all
| the alpha type funds don't seem to advertise themselves as
| this.
| financltravsty wrote:
| You are not an UHNW individual/institutional investor, so no
| "fund managers" of any note are going to waste their time on
| this wager.
|
| "Beating an index" is really easy. Up to $10MM you can choose
| most any financial instrument class in the U.S markets and have
| a good probability of finding alpha for a long time (that would
| beat the S&P500 18.40% YTD). Many proprietary trading firms, or
| market makers, or quantitative trading shops do this regularly.
| Discretionary and systematic funds? Usually not. If their
| processes worked consistently, they would have no need to take
| outside capital and deal with relationship management. They
| could simply use more leverage (not exactly, but simplified for
| the general reader).
|
| This is also ignoring the fact there are no details in TFA
| about actual portfolio compositions or returns -- i.e. this is
| a PR piece.
|
| If your NW is under <$100MM, you should be focusing on hyper-
| growth strategies -- and not mentally limiting yourself on what
| is basically financial propaganda.
| dkekenflxlf wrote:
| ++1!!
| archagon wrote:
| What are "hyper-growth strategies"?
| financltravsty wrote:
| Anything entrepreneurial where there are outsized rewards
| for amount of risk taken.
|
| I.e. not working a career unless it's necessary to build
| contacts or learn the "secret sauce" that you can leverage
| for the aforementioned
| toomuchtodo wrote:
| https://longbets.org/362/
|
| > "Over a ten-year period commencing on January 1, 2008, and
| ending on December 31, 2017, the S&P 500 will outperform a
| portfolio of funds of hedge funds, when performance is measured
| on a basis net of fees, costs and expenses."
|
| Predictor: Warren Buffett | Challenger: Protege Partners, LLC
|
| https://longnow.org/ideas/warren-buffett-wins-million-dollar...
| ("Warren Buffett Wins Multi-Million Dollar Long Bet")
| KMag wrote:
| Disclaimer, I work for a market-neutral fund, and have close
| friends high up in prop shops.
|
| Presuming all strategies have a curve of diminishing marginal
| returns as assets under management increase, you would not
| expect any fund accepting outside money to have expected
| returns beating the market, but you would expect many of them
| to have a combination of correlation to the market and expected
| returns that would make them an attractive component in a
| basket of broad index ETFs and market-neutral funds. (Assuming
| risk-adjusted returns are the utility function being optimized.
| If variance is their preferred risk metric, this results in
| optimizing Sharpe ratio via mean-variance optimization, MVO.)
|
| It's fair to assume that any fund manager is optimizing the sum
| of returns from their own personal investments in the fund plus
| fees from outside investors. They pick the place on the
| volume/risk-adjusted-returns curve that still keeps their fund
| attractive enough to outside investors, and maximizes their
| personal profits (personal returns plus fund fees).
|
| If that optimal point on the volume/risk-adjusted returns curve
| for their particular strategy is at a point where risk-adjusted
| returns beat the market, then they maximize their returns by
| either never accepting outside funds (prop shops) or by not
| accepting additional funds and gradually buying out their
| investors (such as RenTech's famous Medallion fund).
|
| So, (assuming diminishing marginal returns) it's not rational
| to simultaneously accept outside investment and beat the market
| on a risk-adjusted basis.
|
| I suspect that many market-neutral funds could reliably beat
| the market on a risk-adjusted basis, but their volume/risk-
| adjusted-returns curve shape and their fee structures make it
| optimal for them to operate at a point on that curve where
| their expected returns are below the market.
|
| Note that this rational self-interest optimization below market
| returns isn't bad for the investors. Under most fee structures,
| it ends up being close to maximizing total investor returns.
| Increasing percentage returns would mean kicking out some
| investors.
|
| RenTech's Medallion Fund and many prop shops, and funds that
| are currently slowly buying out their investors seem to
| indicate there are at least some strategies where the optimal
| volume/returns trade-off is above market returns. You would
| expect all funds that are currently open to more outside
| investment to either be young and lacking capital or else have
| an optimal point on the volume/returns curve that is below
| market returns.
|
| Note that as previously mentioned, a simple mean-variance
| optimization on a basket would allocate funds to both index
| ETFs and market-neutral funds returning a bit under the market
| on average. It's entirely possible that both fund investors and
| fund managers are being perfectly rational.
|
| Of course, there are also plenty of people out there who fool
| themselves into thinking they know what they're doing. The
| world certainly isn't perfectly rational.
|
| I'm just saying that in a perfectly rational world, assuming
| (1) utility function of risk-adjusted-returns (e.g. Sharpe
| ratio, resulting in mean-variance-optimization) (2) declining
| marginal returns on investment, you would expect all funds
| accepting outside investors (except for young funds desperate
| for money) to under-perform the market in expected returns.
|
| Now, everyone talks about Sharpe ratio on the outside, but the
| particular risk models actually used internally by any fund are
| almost certainly not just variance of returns. I presume all
| funds simultaneously apply a mixture of commercially available
| risk models and internally developed risk models. Sharpe ratio
| is far from perfect, but it's a good least-common-denominator
| for discussion, and doesn't give away any secret sauce.
|
| Side note: it would be rational for someone to take you up on
| your proposal and simply use index futures to take a highly
| leveraged position on your benchmark index. As long as they had
| enough money to make you whole in the case of bad tracking
| error and large downturns, their expected returns would be
| large. However, you wouldn't be very smart to take such an
| agreement instead of just getting leverage yourself. This
| demonstrates why risk-adjusted returns are usually more
| important than expected returns.
| HFguy wrote:
| There is a similar but different product (without the downside
| protection).
|
| A fund manager can replicate the index with derivatives and
| overlay their alpha on top of it.
|
| Google "alpha overlay" or "portable alpha" for more info.
|
| These types of products were more popular about 10-15 years
| ago.
|
| Firms typically charge just for the alpha for these strategies.
|
| You are asking for the manager to sell you an option.
| lumb63 wrote:
| Something I don't see talked about enough is the extent to
| which the rise of passive investing increases the extent to
| which passive investing is the best strategy. Passive investing
| is predicated entirely on either freeloading off of the
| decisions of actively managed portfolios, who will adjust the
| market prices of securities efficiently, therefore resulting in
| passively managed funds automatically owning the "best" stocks
| because the bad ones will fall out of the indices; or it is
| predicated on what is effectively a Ponzi scheme wherein if
| everyone passively invests the same, then that form of passive
| investing will yield the best returns.
|
| For analogy, consider school students trying to get all the
| questions right on the test. The first scenario is equivalent
| to one student studying hard to find the right answers. The
| rest of the class copies his answers and benefits from his
| efforts. The other scenario is no student trying hard, them all
| failing, but succeeding because the teacher curves the grades.
|
| Note that both of these scenarios, especially the second
| scenario, results in stock prices which become increasingly
| detached from the economic reality of companies in proportion
| to the extent to which passive investing becomes prevalent.
|
| For instance, assume stock XYZ is a bad investment but is in
| the S&P 500. If 90% of funds are actively managed, maybe they
| can sell a sufficiently large amount of it to push it out of
| the S&P 500 and save the passive investors from owning it. But
| if 90% of funds are passively managed, even if XYZ is hot
| garbage, the 10% of passively managed funds cannot possibly
| sell enough to make up for the fact that 90% of the market
| participants are indiscriminately buying a terrible stock.
|
| Passive investing breaks the market to some extent. The free
| market system is predicated on having rational participants,
| not zombie participants.
| hankchinaski wrote:
| What you describe can be measured with return dispersion, as
| more people invest with passive index more opportunities
| arise for active investors. So they balance each other
| citizen_friend wrote:
| This sounds clever but many funds did exactly that. What's your
| point?
|
| S&P + nvidia was better than just S&P over the last 5 years.
| Beijinger wrote:
| All this is true, and there are many good comments in the thread
| here. But this "hey dude, stock picking is for idiots and all non
| idiots but index funds" should be treated with caution. Index
| funds are an extremely clever idea but were never meant to be
| used on such a scale.
|
| To give you some ideas:
|
| https://www.forbes.com/sites/chriscarosa/2024/04/02/index-fu...
| tossandthrow wrote:
| There are a lot of unknown for the markets in the future. Also
| the 0 or negative interest rate environments we will probably
| enter (again).
|
| IMHO we need to rethink or tweak the financial system sooner
| rather than later.
| nerdponx wrote:
| On the contrary, that article makes it seem perfectly fine to
| invest in index funds.
| jacobsimon wrote:
| One of my big brain investing ideas is to pick the stocks at
| the top of the index instead of buying the whole index. If
| index funds continue to rise in popularity, the stocks that are
| at the top will benefit most from passive investment volume.
|
| Plus, index funds follow a kind of Pareto principle where the
| top stocks contribute disproportionately to the total return
| anyway.
|
| As I've gotten older though, one of my realizations is that the
| tax-free rebalancing of index ETFs is their most valuable
| property, rather than their actual choice of equities.
| jackcosgrove wrote:
| I had an active manager reach out to me with exactly this
| strategy.
|
| I didn't look at the fees or rebalancing schedule super
| closely, because I didn't want to invest with the guy, but
| IMO his market-beating claims were due to increased
| concentration during a bull market (risk) which could go
| sideways fast if he didn't rebalance at opportune times.
| ghaff wrote:
| Which, without looking, probably means NASDAQ today--and
| certainly the top 50 or whatever tech stocks by whatever
| metric. That didn't look so great in late 2001. Certainly
| my T Rowe Price tech fund cratered. Tech has been very
| good, even relatively speaking through the great recession,
| since then.
| jacobsimon wrote:
| The best approximation I've found is S&P has this Top 10
| index[1]. Over the last 10 years it has performed 18%
| annually vs 11% for the overall S&P 500, but that's
| obviously been a historic bull run in large cap growth
| stocks. I can't find data going back to 2000 to see how
| that strategy would have played out, but curious if
| someone else finds it or crunches the numbers.
|
| 1. https://www.spglobal.com/spdji/en/indices/equity/sp-50
| 0-top-...
| ghaff wrote:
| Yeah, for what it's worth, my financial advisor is
| pushing me towards more value stocks and some more bonds.
| (I am somewhat older as well in addition to be in a
| position where being conservative makes sense.) Was just
| doing some research.
| Mistletoe wrote:
| https://www.aqr.com/Insights/Perspectives/Value-Spreads-
| Back...
|
| I'd be cautious that you are about to get a wicked mean
| reversion.
| jacobsimon wrote:
| Yeah to clarify, I don't necessarily recommend (or even
| follow) this strategy, I still mostly invest in passive
| index funds.
| Mistletoe wrote:
| Ah I see, carry on then!
| WillPostForFood wrote:
| There is an old strategy that is kind of the inverse of this
| this called Dogs of the Dow where. You buy with stocks with
| the highest dividend-to-price ratio (implicitly
| underperforming), looking for the rebound.
|
| https://en.wikipedia.org/wiki/Dogs_of_the_Dow
| bityard wrote:
| Index funds are not some clever hack, they are just tracking
| the combined productivity of the publicly traded companies that
| make them up. Whole market, or the top 500 as a representative
| slice, whatever. When you buy the whole US market for example
| you are saying, "I strongly believe that the overwhelming
| majority of companies in the US want to make shitloads of money
| and pass it down to themselves and their shareholders."
|
| Index funds will never bring down the market as long as
| individuals and companies are allowed to trade individual
| stocks at prices of their choosing. There will _always_ be
| someone who thinks a particular stock is overvalued or
| undervalued. Those people set the prices.
| dukeyukey wrote:
| Something I've wondered is how index funds effect companies
| entering the index for the first time.
|
| Like, let's say there's a company (TryerCo) that is the 501st
| biggest in the US. Big, but still one step away from being in
| the S&P 500.
|
| Then, one of the S&P 500s collapse. They exit the index, and
| TryerCo enters the index at position 500, despite no material
| change since the day before.
|
| Doesn't this mean a whole _heap_ of index funds will suddenly
| start buying TryerCo stock, sending it up thanks to the
| arbitrary number 500?
| gizajob wrote:
| The ETFs are generally rebalanced once a quarter, so yeah,
| it really is a big deal when a company enters one of the
| main indices, and the price starts to move up in
| anticipation of the listing, then stays up because the
| ETFs, as you intuit, have to start buying it as a component
| of the market. Supermicro entering S&P500 and Arm entering
| Nasdaq 100 being good examples recently.
| Marsymars wrote:
| This is basically priced in based on the odds of entering
| an index in the same way that potential acquisitions get
| priced in based on the odds of the acquisition going
| through.
|
| I swear I've seen actively managed funds that explicitly
| trade based on stocks' potential to enter/leave indexes,
| but it's a terrible batch of terms to try to google.
| TheRoque wrote:
| So in the end, what's the key takeaway regarding global economics
| ? If (some of) the most well-paid people cannot guess the market,
| then doesn't it mean that they are useless ? Then why are we
| paying their services ?
| weard_beard wrote:
| Same reason we pay the TSA.
| yieldcrv wrote:
| In private equity you are employing the managers to create
| opportunities
|
| And during bear markets I've seen some managers create the most
| onerous terms far beyond what I could think of, and that's paid
| excessive dividends for me
|
| I think that's the real hedge that's overlooked here
|
| The performance of private funds is also not a complete picture,
| individual limited partners have different profit and loss than
| whatever metric the whole fund is subject to, someone that joined
| as an LP after any trade doesn't have their capital allocated to
| that prior or existing positions, only the subsequent ones. so
| its not really possible to judge performance of fund managers in
| comparison to indices the way that it is popularly compared.
| Unless LPs are showing their own performance in a scatterplot,
| nobody knows anything. and LPs are typically subject to NDAs.
|
| I just think it's too reductive to say nobody can beat the index,
| then move the goal post to longer and longer time frames. You
| only need to be successful once, in any time frame but
| specifically shorter ones
| Cthulhu_ wrote:
| Alright, how much of this is hard science and how much is just
| survivorship bias?
| deepnotderp wrote:
| Whenever the topic of index funds come up, people should
| remember:
|
| 1. The benchmark for hedge funds is _not_ the sp500, it's the
| bond market
|
| 2. Because the sp500 is inherently a _bet_ , that America's top
| few companies will perform well. This is _not_ a purely risk
| free, hands off bet.
|
| If you bought the Japanese Index fund, the Nikkei, even today it
| hasn't returned to its 1980 peak
|
| You might say "I'll just get a global index"- in which case
| congrats, you've underperformed hedge funds!
|
| 3. There are more factors than just investment returns- ie
| volatility (Sharpe), drawdowns, etc
|
| So despite what HN seems to think, the hedge fund industry is not
| in fact, full of idiots.
| santoshalper wrote:
| I don't think most of us think the hedge fund industry is full
| of idiots. Speaking only for myself, I think it's mostly full
| of grifters.
| kgwgk wrote:
| > 1. The benchmark for hedge funds is not the sp500, it's the
| bond market
|
| There is not _a_ benchmark for "hedge funds" as they are not
| really _a_ thing.
|
| In some cases S&P 500 may be an appropriate benchmark. Unless
| Bill Ackman is not a true hedge fund manager, I guess. "In
| 2023, Pershing Square's 20th year, Pershing Square Holdings
| generated strong NAV performance of 26.7% versus 26.3% for our
| principal benchmark, the S&P 500 index."
| dkekenflxlf wrote:
| So, for SURE it is possible to beat "the market", but:
|
| - strategy is limited up to max 1mio per account (well, maybe 2
| pr 3)
|
| - you need a tailored software, tools like MT/et al wont help you
|
| - with a leverage of 5-10, its possible to achieve gigantic
| returns
|
| - system needs to be capable of going short as well
|
| - your individual application should abstract-away all dauly
| charting&news noise: what counts is statistics and propability
| only, do not check CNN et al
|
| EDIT: - this approach cant be done by ANY institutional corp due
| to regulations, so they are not doing it
| jbs789 wrote:
| Can you elaborate on the regulations preventing corp
| implementation here please?
| dkekenflxlf wrote:
| Sure, thanks for this question!
|
| In case of public funds:
|
| Depending on the jurisdiction, funds are allowed to invest
| only in certain securities, like stocks or bonds. In most
| countries, they are not allowed to use all available
| products; esp all products which offer high leverage (and
| highlosschances) are not allowed for institutionals.
|
| A private prop trading company may do it, though they are not
| managing billions (as the pension fund in the article); and
| those prop traders in reverse can not that easily attract
| "other people money"
| enahs-sf wrote:
| The macroeconomic read between the lines takeaway for me from
| this is, these pension funds are big time LPs in VC firms. If
| that well dries, it has substantial downstream effects for the
| startup ecosystem and raising capital.
| akira2501 wrote:
| The title was correct yesterday. Why is the title editorialized
| today?
|
| "What Does Nevada's $35 Billion Fund Manager Do All Day? Nothing"
|
| This is the actual title of the article, the page, and the
| printed version. There was no reason to have edited this except
| for optics. If true, that's absurd, dang.
| nick7376182 wrote:
| Because on HN we like titles to have information and not be
| click-bait. The WSJ title is prime click-bait.
| akira2501 wrote:
| So, clickbait is fine, as long as we just editorialize the
| title? That's an unusual standard.
| Thorrez wrote:
| Are you saying the new title is clickbait? How so?
| pvg wrote:
| Pretty much standard for HN, there are endless mod comments
| explaining it. Although they make more sense if you
| distinguish between 'changing' and 'editorializing'.
| Thorrez wrote:
| He doesn't literally do nothing, does he? So I don't think it
| was exactly correct. And it was vague because it didn't explain
| what the article was actually about.
| ilamont wrote:
| There most definitely is a reason to edit titles: to reduce
| clickbait or shorten titles.
|
| The system even automatically removes certain clickbait
| elements, for instance "How" is stripped out of submitted
| titles.
| Sparkyte wrote:
| Always better to invest and just let the market over time take
| care of it, the make quick cash never works.
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