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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

#71

Post by nradov »

qaq wrote: post #47
11thEarlOfMar wrote: post #40

Earlier quoted context omitted.

In any auction, there has to be the first person declaring what the item is worth. If 100% of the investing is passive, there is no first bidder, so how is a stock's value determined? In the current situation, 34% of the money passively follows the active investors. That gives the active investors a 34% amplifier in their action. I'd say the possible bad news is that the larger the passive pool, the less capital it t…

This is exactly how it will balance out. If this passes a threshold such that funds that take advantage of the phenomena will produce a meaningfully higher return than index funds then money will start flowing into such funds balancing out the effect.

Not just actively managed funds. There will always be proprietary traders speculating with their own or their employer's capital. As long as some kind of active investors make up ~10% of the market that will be sufficient for price discovery.

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

#72

Post by nemo44x »

n72 wrote: post #22

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.

With enough money invested I find Betterments fees very reasonable. Especially when you consider features such as tax loss harvesting. Is that something that requires little to no time if you actively manage your index funds? Maybe there are tools which aid you with that?

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

#73

Post by walshemj »

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 suspect that if there is a big bond crash which is likely to happen a lot of those invested in index funds that robotically invested in bonds will be taking some big losses.

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

#75

Post by nemo44x »

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.

Believe me, Jim Simons didn't rely on luck. He's a mathematics genius and rather creative. You could say he was lucky in that he sort of pioneered the entire algorithmic trading thing and was well ahead of the curve because of that. It was simply low hanging fruit for a long time before others began to catch on.

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

#76

Post by walshemj »

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.

True but some of my active funds correctly saw the problems with the UK banks and got out before the big losses an index fun would have had to buy those banks and taken the loss.

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

#77

Post by ap22213 »

mark-r wrote: post #74

There's an aspect of self-fulfilling prophecy to this. Higher demand leads to higher prices, and as more money flows into indexes the stocks in those indexes are going to rise relative to the rest of the market. Thus their earnings become harder to beat.

Wouldn't that knowledge be accounted for in the individual stock prices?

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

#78

Post by ucaetano »

mark-r wrote: post #74

There's an aspect of self-fulfilling prophecy to this. Higher demand leads to higher prices, and as more money flows into indexes the stocks in those indexes are going to rise relative to the rest of the market. Thus their earnings become harder to beat.

Not exactly, as money flows to those stocks, they become overpriced, and will under-deliver returns in the future. On the other hand, other stocks will be undervalued, giving better returns in the future.

So it is a self-correcting system, not a self-fulfilling prophecy.

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

#80

Post by dpweb »

Returns are used to quantify results, but you can't compare returns between a hedge fund or trading or market making operation - and a retail customer putting away their retirement money. Two entirely different operations at work that result in an overall annual return for each.

In buying a stock, you're buying exposure to a number of factors that affect the stock price: the company, the money flows into/out of that company's industry, and the flows in/out for stock market as a whole. In buying an index you get a more pure exposure to the stock market as a whole. When indexes do well, its only because money is flowing into it from other asset classes (or "money printing" by central banks).

Whether we should accept Efficient market hyposisis as explanation of Indexes beating pros, is a little more complicated. Yes, its true everyone has access to the same information. In fact, it's illegal to trade on insider information.

However, when Indexes beat pros, people are quick to say, 'yep.. Efficient market..', but Indexes have support that the individual stocks or baskets don't have. A pledged support by the Fed to print money to prop it up.

Take Wells Fargo. Maligned in the news, down stock price, but still a powerful bank. Buying the stock - not a irrational decision. But, will the Federal Govt let them go down? They didn't AIG, but who knows. Now imagine the Index crashes, the Fed steps in. Indexes have the advantage here.

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