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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

#171

Post by lordnacho »

dasil003 wrote: post #154
darawk wrote: post #142

Earlier quoted context omitted.

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 misprici…

Wow, this is the height of hubris. Of course luck can play a factor. There's no law of the universe that a correlation you observe over the past century of human activity is going to hold indefinitely. Obviously some quant funds have better models than others and it's not wrong to attribute that to intelligence and skill, but they absolutely can have the rug pulled out from under them by changing market conditions ma…

They trade very, very often. You can be lucky if you buy a couple of stocks and wait around a few years. Someone I know had parents who bought Nokia in the 1980s and sat on it until the mid 200s. That's luck.

You can guess a coin flip 5 times in a row. A few people out of a hundred will do so.

But you cannot get significantly over 50% correct on millions of coin flips. That's not luck.

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

#172

Post by lordnacho »

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?

You should see that your candidates will falter as time passes.

Suppose there are 10 funds with the track record of RenTech. In 10 years, you wouldn't expect them all to be as stellar.

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

#173

Post by lordnacho »

Animats wrote: post #132

It would be interesting to have a fund which was mostly an index fund, but avoided "losers" based on simple criteria. Picking overpriced losers is easier than picking winners. (I did that for the first dot-com boom, at "downside.com".) That's a concept worth testing against historical data.

That's what smart beta does. You take an index and rejig it slightly to eke out a somewhat better return.

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

#174

Post by hibikir »

jganetsk wrote: post #164
digi_owl wrote: post #163

Earlier quoted context omitted.

I seem to recall a claim that companies no longer issue stock to raise capital. Instead they issue bonds, much the same way as a government or municipality.

Every IPO is a company issuing stock to raise capital.

True, but we are having a lot less IPOs lately: We see companies with valuations well in the billions, venture backed, that aren't IPOing. We are seeing non-public companies writing contracts with dual-trigger RSUs because options have become completely worthless.

So while it's still possible to raise capital by printing stock, this is happening less and less lately.

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

#175

Post by Taek »

devilsavocado wrote: post #137
Taek wrote: post #66

Earlier quoted context omitted.

Well, you've always got insiders in the sense that most people know their own industry better than they know other industries. Passive funds are great when you want to diversify or lack knowledge. But for example I've got a ton of money in cryptocurrency right now, it's my field and I've got way better-than-average knowledge about some of the coins. This helps me make informed investments, and I've been able to beat…

Can you expand on how having better-than-average knowledge about some crypto currencies allows you to make money investing in them? I doubt you mean that you actually have knowledge of when and how the price is going to change. Are you just betting on a general increase in value, or doing some form of pairs trading or arbitrage? How comfortable are you with rapid 30% price swings?

I'm very comfortable with rapid price swings. My strategy is to buy when they are silly underpriced and wait. They may drop further but almost always if there's a good dev team it'll jump when they have big enough news. So you just wait.

I've yet to be bold enough to short something overpriced but there are plenty of cases where something has struck me as obviously overpriced and within a year the price has corrected.

Game plan definitely involves waiting months at a time.

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

#176

Post by vostok »

paulpauper wrote: post #65
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…

this company is like citadel, which is that their main business is market making and non-directional trades. They dont pick directional investments, as most investors do. rather they are in the middle picking up pennies, except many billions of them. But these returns may be exaggerated or there is information missing...20% a year far exceeds the rate capital is being created by the global economy. At that rate, it w…

This is not an accurate description of that hedge fund.

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

#178

Post by lordnacho »

As someone who's been at hedge funds for over a decade, I often wonder what I'd do if I just had ordinary access to the markets.

First of all, I have to ask why the equity market should be your benchmark. And if it's because you think the market generally goes up (not obvious) why don't you just get leverage on your ETF, so that you basically always beat the market?

There's another way to beat the market. Smart beta products do variations of it, but here's a concrete one. Basically my brother had some class about markets and needed something fast, so I just told him to take the S&P 500, lop off the top 25% of stocks measured by beta, and scale up the rest. Ta-da. You'll probably find costs are high, and there's a bunch of admin, but I suspect there's now a bunch of smart beta ETFs that do the same thing.

As for the EMH, I doubt that it's true. The problem for ordinary people is you won't be allowed to invest in strategies that are very good.

It makes sense for people on the inside: suppose I have a strategy, with a Sharpe > 5, that uses very little capital. What am I going to do with that? Get investors? No, I'll borrow money and take the profits myself.

What does that leave? A bunch of strategies with much less attractive risk profiles. If I have a Sharpe of around 1, I'm expecting long flat periods. I'll have to get investors for that. But investors are fickle. One bad year and they flee, even though you should have one every few years. You could easily have a couple of losing years with that kind of Sharpe. So what do we find with that type of shop? They're made of marketing. Box-checker salespeople who know what to say to institutional investors. IIs who buy IBM. Or are quick to jump the gun. /rant

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

#179

Post by edanm »

kolbe wrote: post #115
edanm wrote: post #113

Earlier quoted context omitted.

I disagree. For one thing, there are still plenty of active investors around. The fact that the less active investors around, the easier it is for them to make returns, will help the market stable and full of "enough" investors. It is absurd to worry right now about not having enough finance professionals, considering just how many people are in the market. In terms of what's best for a single person deciding where t…

I appreciate your opinion, but when I see that companies like JNJ are 67% owned by Mutual Funds and Institutional Investors[1], most of whom are low-cost and inactive, it tells me we've gone too far. An I am not advocating for more finance professionals. Paying active managers to invest for you can cause the same problems I'm talking about. I'm advocating for personal responsibility and attentiveness. [1] http://fina…

Do you really think the average stock owner has the ability or training to asses companies, in their spare time?

Honest question. I'd answer no, considering that even trained professionals aren't so amazing at it.

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

#180

Post by toephu2 »

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.

Wealthfront is 3x (.25% vs .05%) more expensive than a lot of great Vanguard funds [1]. And with Wealthfront you might be investing in major index funds anyway except you end up paying more. Why not go with any of Vanguard's S&P 500 funds (mutual fund or ETF) or any other index fund of your choice under Vanguard? I doubt Wealthfront can beat their returns after you factor in cost in the long run (20+ years). Also Vanguard is owned and run by the shareholders, their entire structure is setup so that there is no conflict of interest and they really are on your side, since basically you are part of them when you invest [2]. Wealthfront is a corporation whose sole purpose is to turn a profit.

[1] https://personal.vanguard.com/us/funds/snapshot?FundIntExt=I...

[2] https://about.vanguard.com/what-sets-vanguard-apart/why-owne...

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