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A Professor Who Was Right About Index Funds All Along

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Re: A Professor Who Was Right About Index Funds All Along

#21

Post by ikeboy »

pedrocr wrote: post #7
shubhamjain wrote: post #2

Being lucky doesn't explain the existence of Renaissance Technologies[1], one of the very first quant fund companies, which has averaged a 71.8% annual return from 1994 through mid-2014. In fact, "the fund’s worst year was a 21 percent gain, after subtracting fees". Of course, it's very much of an outlier — just like Facebook / Google / Uber, if we retrospectively see startup funding and hedge fund investing. [1]: ht…

The point of index funds isn't that at any moment in time no one can have a market beating strategy. The point of index funds is that by definition the bulk of the market can't have above average returns. So as a retail investor your best bet is to just find a cheap way to ride the average of the market.

That's a valid point, but plenty of people do claim that "no one can have a market beating strategy". Strong EMH.

Re: A Professor Who Was Right About Index Funds All Along

#22

Post by n72 »

I recommend Weathfront and Betterment to all my less mathematically inclined friends. However, if you spend only a few hours getting acquainted with asset allocation and rebalancing principles, you can do pretty everything that these services do without their fees.

Re: A Professor Who Was Right About Index Funds All Along

#23

Post by jbuzbee »

I'm a big believer in index funds and have been putting my money into them for a long time. But... you have to wonder where this is all ending up as more and more people move to passive index funds. The power of the market is based on millions of individual opinions on the price of a company's stock. On average, over time, these collective opinions will be correct. But say in the extreme case, it got to the point where all funds were invested passively, we'd lose this pricing mechanism. Individual stock prices would not reflect the true value of a company. Instead, the price of each company's stock, healthy and sick alike, would just rise and fall in synch with the market as a whole. But then perhaps this would be self-correcting as sophisticated investors would notice the pricing errors, create managed funds and the cycle would start anew...

Re: A Professor Who Was Right About Index Funds All Along

#24

Post by ikeboy »

grondilu wrote: post #19
ikeboy wrote: post #17

Earlier quoted context omitted.

So your strategy isn't, "buy the whole market", it's "buy the market as it existed in $current-year", which misses all the new stocks that come out. (Also it assumes you have a fixed amount to invest and never want to invest more)

I don't get what you mean. You can buy and hold, and keep buying.

But then it's not a one time-fee. More generally, your strategy only works if you're investing a large amount every time, it doesn't scale down. You can't put 10k into 5000 stocks, and even 500 stocks would be difficult.

Re: A Professor Who Was Right About Index Funds All Along

#25

Post by kiba »

jdmoreira wrote: post #9
shubhamjain wrote: post #2

Being lucky doesn't explain the existence of Renaissance Technologies[1], one of the very first quant fund companies, which has averaged a 71.8% annual return from 1994 through mid-2014. In fact, "the fund’s worst year was a 21 percent gain, after subtracting fees". Of course, it's very much of an outlier — just like Facebook / Google / Uber, if we retrospectively see startup funding and hedge fund investing. [1]: ht…

Luck can be the actual explanation. By the law of the large numbers, some funds will be a success for quite some time. Just as some people do win the lottery. I don't think it's surprising that a couple of funds have a great track history even if the game is just pure luck.

How do you distinguish between pure luck and actual skills?

Re: A Professor Who Was Right About Index Funds All Along

#26

Post by aantix »

jbuzbee wrote: post #23

I'm a big believer in index funds and have been putting my money into them for a long time. But... you have to wonder where this is all ending up as more and more people move to passive index funds. The power of the market is based on millions of individual opinions on the price of a company's stock. On average, over time, these collective opinions will be correct. But say in the extreme case, it got to the point whe…

I think you're correct on your last statement; anytime there's predictability introduced into a system, there's going to be a counter-action you can perform to exploit those tendencies.

Re: A Professor Who Was Right About Index Funds All Along

#27

Post by [deleted] »

n72 wrote: post #18
grondilu wrote: post #11

Me, I don't even believe in funds. If managers are not better than blindfolded monkeys, why should we even pay them? Just buy diversified stocks, and never sell unless you need cash. https://en.wikipedia.org/wiki/Buy_and_hold

As some of those stocks grow and some shrink, you'll end up overweighted in certain categories and no longer diversified.

[deleted]

Re: A Professor Who Was Right About Index Funds All Along

#28

Post by hash-set »

shubhamjain wrote: post #2

Being lucky doesn't explain the existence of Renaissance Technologies[1], one of the very first quant fund companies, which has averaged a 71.8% annual return from 1994 through mid-2014. In fact, "the fund’s worst year was a 21 percent gain, after subtracting fees". Of course, it's very much of an outlier — just like Facebook / Google / Uber, if we retrospectively see startup funding and hedge fund investing. [1]: ht…

It could be another Madoff scheme.

Re: A Professor Who Was Right About Index Funds All Along

#29

Post by n72 »

jbuzbee wrote: post #23

I'm a big believer in index funds and have been putting my money into them for a long time. But... you have to wonder where this is all ending up as more and more people move to passive index funds. The power of the market is based on millions of individual opinions on the price of a company's stock. On average, over time, these collective opinions will be correct. But say in the extreme case, it got to the point whe…

There are companies which will fairly obviously perform well in the future. However, because of active investing, this projected performance gets priced in, so they aren't a bargain. If the whole world except one active investor invested in indexes, then the active investor would have a very easy time, since that projected performance wouldn't be priced in and the stock would be a bargain.

Re: A Professor Who Was Right About Index Funds All Along

#30

Post by Ericson2314 »

jbuzbee wrote: post #23

I'm a big believer in index funds and have been putting my money into them for a long time. But... you have to wonder where this is all ending up as more and more people move to passive index funds. The power of the market is based on millions of individual opinions on the price of a company's stock. On average, over time, these collective opinions will be correct. But say in the extreme case, it got to the point whe…

I think the more worrisome problem is a lack of shareholder input in corporate decision-making.
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