A Professor Who Was Right About Index Funds All Along • Hacker News Board

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

#51

Post by michaelcampbell » Sat, Oct 22, 2016, 2:46 PM UTC

kiba wrote: post #25

jdmoreira wrote: post #9

Earlier quoted context omitted.

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?

I believe his point is that you can't, because "actual skills" need not exist. It might ALL be luck, and outliers will exist. And, their existence doesn't prove anything about luck or the lack of it.

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

#52

Post by icebraining » Sat, Oct 22, 2016, 2:46 PM UTC

Ericson2314 wrote: post #30

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.

Index funds still have an input on the corporations.

https://about.vanguard.com/vanguard-proxy-voting/update-on-v...

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

#53

Post by keltex » Sat, Oct 22, 2016, 2:47 PM UTC

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…

The other thing to keep in mind that index funds slice and dice the market in many different ways. The classic "Index 500" fund is a market-cap weighted fund. But there are many other types of funds. For example, Vanguard has 62 different index funds. And there are fundamental weighted index funds which, "...may be based on fundamental metrics such as revenue, dividend rates, earnings or book value". (http://www.investopedia.com/terms/f/fundamentally_weighted_i...) There are funds which take different selections of the market (top 1000 stocks or top 100 stocks, etc).

So somebody might purchase an index fund and think they are investing passively, they are really actively choosing a passive strategy.

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

#54

Post by [deleted] » Sat, Oct 22, 2016, 2:47 PM UTC

hash-set wrote: post #34

frandroid wrote: post #6

Earlier quoted context omitted.

The point is not that all human-picked funds/portfolios perform worst than index funds, but that most of them do.

Go over to Bogleheads and say that. They'll set you straight pretty fast. The point is that over a long enough period of time, there is no advantage to managed funds vs. index funds and the managed funds usually underperform. Some firms have played tricks with their funds to make them appear to beat the market, but it's never sustained.

[deleted]

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

#55

Post by [deleted] » Sat, Oct 22, 2016, 2:47 PM UTC

hash-set wrote: post #34

frandroid wrote: post #6

Earlier quoted context omitted.

The point is not that all human-picked funds/portfolios perform worst than index funds, but that most of them do.

Go over to Bogleheads and say that. They'll set you straight pretty fast. The point is that over a long enough period of time, there is no advantage to managed funds vs. index funds and the managed funds usually underperform. Some firms have played tricks with their funds to make them appear to beat the market, but it's never sustained.

[deleted]

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

#56

Post by dajohnson89 » Sat, Oct 22, 2016, 2:47 PM UTC

hash-set wrote: post #34

frandroid wrote: post #6

Earlier quoted context omitted.

The point is not that all human-picked funds/portfolios perform worst than index funds, but that most of them do.

Go over to Bogleheads and say that. They'll set you straight pretty fast. The point is that over a long enough period of time, there is no advantage to managed funds vs. index funds and the managed funds usually underperform. Some firms have played tricks with their funds to make them appear to beat the market, but it's never sustained.

But in the event of an extreme rally, your picked stocks can make you a huge return. Fast. Then you cash out and play it safe.

Risky, but this is why people try to beat the market. This is the allure of gambling.

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

#57

Post by Symmetry » Sat, Oct 22, 2016, 2:48 PM UTC

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…

It gets easier and easier to beat the market (due to less people trying) until eventually investors can make enough money doing that to earn the fees they charge for trying. There's an equilibrium when that happens.

EDIT: Or, to put it in EHM analogy terms, the number of people looking for loose change on the sidewalk will go down until there are few enough to support themselves from the money people actually drop.

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

#58

Post by icebraining » Sat, Oct 22, 2016, 2:49 PM UTC

kiba wrote: post #25

jdmoreira wrote: post #9

Earlier quoted context omitted.

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?

That's the argument from A Random Walk for index funds: even if such skills exist, they're indistinguishable from luck, therefore one can't make an informed choice of active fund.

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

#59

Post by nabla9 » Sat, Oct 22, 2016, 2:50 PM UTC

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.

They may also play version of martingale strategy where they pay for higher returns now with increased losses if some rare event in the future happens. This is how very successful hedge funds can beat the market for decades. There is hidden risk somewhere and you better jump off before it is realized.

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

#60

Post by IshKebab » Sat, Oct 22, 2016, 2:50 PM UTC

kiba wrote: post #25

jdmoreira wrote: post #9

Earlier quoted context omitted.

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?

It's impossible to perfectly distinguish them. Anyone that seemed to be skillful could just be incredibly lucky.

But you can get determine a likelihood that they are lucky by monitoring their performance over a long time / lot of games. It's just that if you are evaluating a whole lot of people looking for a rare skillful person, you need a whole lot more time/games to be sure they aren't lucky than if you just had one person to evaluate.