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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

#121

Post by des429 »

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.

I had a conversation with a co worker about this. Its basic probability. Lets assume they make at least 1 trade a day and they have been doing this for the past 25 years. Its a simple binomial probability problem. For them to be correct on that many trades and it to be 'luck' would be a probability in the ~0.00001% range.

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

#122

Post by matco11 »

jganetsk wrote: post #89
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…

Warren Buffett says it's OK, and has an excellent explanation for this. If I recall correctly: imagine you take all the investors in the US economy and put them in a room. Divide the room in halves. One side contains all the active investors, the other side contains all the passive investors. If each side owns roughly half of the economy, their returns will be equal. In that case, it's better to sit on the side with…

Warren Buffett was referring to traditional (long-only) investment funds... He himself was for many years running a hedge fund (and had learned from the pioneers of hedge fund investing.)

https://www.bloomberg.com/view/articles/2012-04-24/what-was-...

http://www.forbes.com/sites/randalllane/2012/03/26/warren-bu...

https://www.quora.com/What-was-the-fee-structure-of-Warren-B...

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

#123

Post by hiou »

Index fund tracking has become successful because one of the goals of US Government policy is to maintain that things like the S&P 500 continue to go up over time. If they go down people get voted out of office.

So the index funds have the full force of the US Government watching over them. This is why economics is not just some math puzzle but often more about politics and sociology.

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

#124

Post by hammock »

nodesocket wrote: post #108

Here is a graph of my personal account which I manage myself vs the S&P 500 index. I am currently beating it with gains on the year of 7.3%, but only thanks to the last couple of strong months. I was deep in the red early on. http://imgur.com/a/XHNTZ

What software are you using there?

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

#125

Post by pooper »

jacques_chester wrote: post #116
nostromo wrote: post #112

Earlier quoted context omitted.

The irony of course is that Buffett became one of the world's richest people by being an active investor.

True, but he (and Munger) generally invest quite conservatively. He doesn't buy for capital gain, but to hold indefinitely. He buys businesses he understands, with financials he understands, for prices he figures reflect a fair discount on the economic value, plus a generous margin of error. When full ownership is taken (his preferred option), the original management is almost always left in place. No rules or guidan…

> True, but he (and Munger) generally invest quite conservatively. He doesn't buy for capital gain, but to hold indefinitely. He buys businesses he understands, with financials he understands, for prices he figures reflect a fair discount on the economic value, plus a generous margin of error.

The Bank of America deal shows how good a deal you can get when you can put $5B where your mouth is

> In exchange, Berkshire Hathaway received $5 billion worth of preferred stock yielding 6% a year plus warrants to purchase 700 million shares of Bank of America common stock at an exercise price of $7.14 per share.

apologies in advance for linking to fool.com http://www.fool.com/investing/general/2015/08/19/how-much-is...

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

#126

Post by wtvanhest »

nostromo wrote: post #112
joezydeco wrote: post #93

Earlier quoted context omitted.

Buffett is close to winning a $1 million, 10-year bet he made with the head of the hedge fund Protege Partners. The bet was simple. Buffett would invest in a Vanguard S&P 500 index fund, and the hedge fund could do anything they wanted. http://fortune.com/2016/05/11/warren-buffett-hedge-fund-bet/ http://www.npr.org/2016/03/10/469897691/armed-with-an-index-...

The irony of course is that Buffett became one of the world's richest people by being an active investor.

Investing successfully is all about adding value. Buffett is an active investor, but he makes his money managing the businesses, not just picking stocks.

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

#127

Post by Applejinx »

kolbe wrote: post #111

I'm going to use this as an opportunity to yet again rail against the idea of indexing. It's a good thing in theory, but like most things, when it's taken to extremes, it's horrible. Passive investments wherein the investor takes zero interest in these investments are and have always been a terrible idea, and nothing in modern history has facilitated this more than index funds. When you give a friend of a friend $10,…

On the contrary, they are a leap forward into an age of abstraction. They address the reality that what people really want is for their capital to increase, period. As such, if you can do an index fund where everything is going to increase because it's part of the index fund and everybody knows index funds beat the market, the consensus opinion is that if you're in the index fund your value is going to increase, and therefore the companies listed can go about their business because their values increase thus justifying them being in the index fund.

Complete abstraction. Always has been, this is just the codification of it. The future catastrophe isn't so much the companies becoming more irresponsible than they already are, because they never particularly were. The catastrophe is more 'the concept of capital becoming meaningless', a sort of conceptual Reichsmark inflation where the numbers we talk about steadily become meaningless and absurd.

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

#128

Post by stale2002 »

kolbe wrote: post #111

I'm going to use this as an opportunity to yet again rail against the idea of indexing. It's a good thing in theory, but like most things, when it's taken to extremes, it's horrible. Passive investments wherein the investor takes zero interest in these investments are and have always been a terrible idea, and nothing in modern history has facilitated this more than index funds. When you give a friend of a friend $10,…

Then how come index funds get so much return?

If index funds are so bad and destroy companies, you would expect them to not get good returns.

But that's not the case, they get great returns!

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

#129

Post by jacques_chester »

pooper wrote: post #125
jacques_chester wrote: post #116

Earlier quoted context omitted.

True, but he (and Munger) generally invest quite conservatively. He doesn't buy for capital gain, but to hold indefinitely. He buys businesses he understands, with financials he understands, for prices he figures reflect a fair discount on the economic value, plus a generous margin of error. When full ownership is taken (his preferred option), the original management is almost always left in place. No rules or guidan…

> True, but he (and Munger) generally invest quite conservatively. He doesn't buy for capital gain, but to hold indefinitely. He buys businesses he understands, with financials he understands, for prices he figures reflect a fair discount on the economic value, plus a generous margin of error. The Bank of America deal shows how good a deal you can get when you can put $5B where your mouth is > In exchange, Berkshire…

Right. In fact the financial crisis was a busy few years for Berkshire-Hathaway. Like everyone else they took a drubbing, but they also unleashed a lot of their unused cash to make deals on generous terms.

It helped that they were structurally inclined to build up cash. As Buffet explains, a booming share market is bad for him: everything is too expensive to buy.

So cash piles up, waiting for good deals of sufficient magnitude to arise.

When a bust arrives, there are bargains everywhere and a lot of money to buy into them.

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

#130

Post by Applejinx »

tedmiston wrote: post #85
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.

One of the two companies actually says in their FAQ (paraphrasing): "Couldn't I just invest a small amount of money with you, then manage a second much larger account myself by hand, mirroring each trade? Yes, but we think our fees are cheaper than the time you'd spend doing that."

What if you get a computer to do it?
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