Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

A Professor Who Was Right About Index Funds All Along

bloomberg.com

Post reply on HN
Print view View original

141–150 of 221 posts

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

#141

Post by Terr_ »

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…

> But say in the extreme case, it got to the point where all funds were invested passively

This came up a couple months ago on HN [0], and to that scenario I say:

> Yeah, it's a bit like saying: "But what if all the animals in the ecosystem became helpless herbivores?"

[0] https://news.ycombinator.com/item?id=12368136

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

#142

Post by darawk »

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.

No, luck cannot be the explanation for what these quant funds do. These funds are run by mathematicians. People with PhD's in probability and physics. They are not being fooled by randomness. They are right, and they are right consistently.

However, they are also at least generally, not making traditional 'investing' decisions. They are making statistical arbitrage bets - they are looking for instances where mispricing exists in the market, and they can make a guaranteed (statistically) profit by buying and selling statistically equivalent securities at different prices. The classical simple example is pairs trading: you notice that coke is always worth 10% more than pepsi, so when you see coke trading at 15% more than pepsi, you short coke and buy pepsi, betting that the gap will close to its traditional norm. Now, what they are doing is obviously substantially more complex and rigorous than that, but that is its flavor.

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

#143

Post by gist »

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.

Often overlooked is the fact that Buffett has used celebrity to his advantage. [1]

Buffett gets to do deals (on better terms no less) that others can't as a result of his celebrity and this has been the case for a long long time.

[1] In the same way Trump has but with a much better track record.

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

#144

Post by darawk »

ikeboy wrote: post #21
pedrocr wrote: post #7

Earlier quoted context omitted.

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.

Those people are demonstrably wrong. See: all successful quant funds, HFT firms, etc..

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

#145

Post by saryant »

tommynicholas wrote: post #135
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…

Agreed - it's what the average investor should do. Even if it's really hard to beat Index Funds consistently, there are two factors that will make active trading always important: 1. Some people will beat the market, and regardless, someone has to try or there's a massive opportunity left on the table. 2. Indexing actually has more of a certain type of risk than passive investing, because if you take a huge loss for…

Your second point has nothing to do with indexing and everything to do with asset allocation. If you're nearing retirement, you shouldn't be holding risky assets like equities.

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

#146

Post by beart »

shostack wrote: post #96
OliverJones wrote: post #84

Earlier quoted context omitted.

Ned Johnson had it right way back when. Why would anybody want average returns when they could pay him big money for below-average returns and the occasional black-monday disaster? Seriously, index fund investing assumes an optimistic outlook. It assumes the managers of companies will do an OK job in the long term and the companies will grow. Index funds allow investors to participate in that growth without having a…

Any good reading on how to determine your allocation strategy? I read up on Bogleheads but there isn't always much on the "why" that is backed by data.

I found this link useful when deciding how to invest my 401k

https://www.reddit.com/r/personalfinance/wiki/401k_funds

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

#147

Post by icebraining »

OscarCunningham wrote: post #104
icebraining wrote: post #48

Earlier quoted context omitted.

I'm not an expert, but index funds still purchase the stocks, so when the active investor bought a stock at an increased price, it would increase the market cap and so the index fund would buy some more of it from them.

Nah, because the value of the stock that the index fund already owned would also increase in the same proportion.

Fair enough, for stocks the index already owned, but what about for the others? If the investor took a stock that wasn't in the top 500 and inflated its value above the 500th stock, wouldn't an S&P 500 index fund then buy it?

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

#148

Post by acchow »

joezydeco wrote: post #93
jganetsk wrote: post #89

Earlier quoted context omitted.

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…

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-...

> That’s not merely a high hurdle—the law of averages suggests it’s near to impossible to clear.

Ugh. Now we have npr teaches "law of averages" backwards

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

#149

Post by Godel_unicode »

des429 wrote: post #121
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.

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.

You're assuming all trades are the same size and have the same upside (and downside) risk.

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

#150

Post by Godel_unicode »

michaelcampbell wrote: post #51
kiba wrote: post #25

Earlier quoted context omitted.

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.

Conversely, if the difference between luck and skill is unknowable, everyone who wins might be skillful. As you said, the existence of winners is not revelatory about the existence of skill.

Related: one can be highly skilled and still lose to someone who is highly lucky.

Post reply on HN