Vanguard Is Growing Faster Than Everybody Else Combined • Hacker News Board

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#231

Post by scrooched_moose » Wed, Apr 19, 2017, 3:52 PM UTC

wdewind wrote: post #222

TheCoelacanth wrote: post #194

Earlier quoted context omitted.

And the market is so huge, that even a slight amount of mis-pricing is a huge opportunity for active investors. A systematic mis-pricing of 0.1% is worth $18 billion dollars. That means the incentive to try to exploit even a minuscule amount of mis-pricing is huge.

> A systematic mis-pricing of 0.1% is worth $18 billion dollars. Can you expand on what exactly that means?

I assume they're basing it on the combined market cap of the S&P 500 [1], the most common passive fund championed by Buffett [2]. At a market cap of $18 trillion, .1% would be $18 billion. Although, they may be basing it on old data, as of March 31 it's closer to $21.2 billion

1) http://siblisresearch.com/data/total-market-cap-sp-500/ 2) https://www.fool.com/investing/2017/02/26/warren-buffett-jus...

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#232

Post by wbl » Wed, Apr 19, 2017, 3:52 PM UTC

jalopy wrote: post #220

bluGill wrote: post #211

Earlier quoted context omitted.

Actually Vanguard claims they care more: active investors will get out if things go bad - they might even make decisions that are good short term bad long term. Vanguard is in for the long term so they care more. One of the things Vanguard can do is ensure good management is in place.

But then that would be active management. This is something Vanguard expressly does not do.

They don't do active fund management AKA stockpicking. The sure do care about making sure management doesn't have it's hand in the till.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#233

Post by rsync » Wed, Apr 19, 2017, 3:55 PM UTC

gabemart wrote: post #56

Animats wrote: post #48

With index funds so big, who determines prices? An index fund tied to the S&P 500 just buys stocks in the proportion that they're in the S&P 500. The price of the stock plays no role in that decision. At some point, this has to create problems, but so far it hasn't. It does mean the active traders, who are basically moving the same money around all day, have an outsized influence on prices. Index funds are so success…

I had assumed - perhaps incorrectly - that as more and more money is invested in index funds and similar passive vehicles, it becomes increasing easy to beat the market as an active trader. My thinking goes like this - as less money in invested actively, the market becomes less efficient at pricing. As the market becomes less efficient at pricing, it becomes easier to make money as an active trader. As it becomes eas…

"My thinking goes like this - as less money in invested actively, the market becomes less efficient at pricing."

Wouldn't it be that the market becomes as efficient at pricing as the accuracy of index inclusion ?

That is, we have replaced the widely varying performance and heuristics of active stock pickers with the more formulaic S&P 500 pickers ?

Presumably that's a lot more efficient, but I suspect there is room for errors and games in index inclusion ...

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#234

Post by antongribok » Wed, Apr 19, 2017, 3:57 PM UTC

foobiekr wrote: post #210

... vanguard being the only brokerage not to offer two factor is a little frustrating.

They do support Yubikey, the feature is called "Security Key", not to be confused with SMS Auth called "Security Code".

https://www.bogleheads.org/forum/viewtopic.php?t=205031

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#235

Post by AnimalMuppet » Wed, Apr 19, 2017, 3:58 PM UTC

malchow wrote: post #197

lr4444lr wrote: post #154

Earlier quoted context omitted.

If you're a Vanguard customer (buying the flagship fund classes, I presume), you're expressing faith in CAPM[0] and EMH[1] on a significant level. Some active investors will probably in the long term scoop up some extra gains, but the question still remains: which of them, over what time horizon, and is that a risk you want to take? Vanguard gives you lots of no-commission funds with 1 day liquidity even in the mutua…

Say more. Why do I believe in the Capital Asset Pricing Model and Efficient Markets (both proven wrong) if I invest in Vanguard's cheap S&P 500 ETF? I invest in their S&P 500 ETF because it's the cheapest way to get diversified exposure to the 500 largest American companies, and I believe that the 500 largest American companies will be more valuable in the future as a combination of valuation, scale, and cash flows t…

The S&P 500 is a reasonable, good investment. I think Efficient Markets is saying "you can't do better". That claim may be false. And yet, it may be close enough to true, especially for a small investor, that Vanguard's ETF is good enough (that is, it's not worth the time and effort to try to find something better).

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#236

Post by pitt1980 » Wed, Apr 19, 2017, 4:03 PM UTC

headmelted wrote: post #166

dsacco wrote: post #159

Earlier quoted context omitted.

I think the parent commenter is more concerned about the economy's overall stability, and believes passive investors could be exploited due to mis-pricing index fund underlyings. I didn't interpret it as a worry about missing out on active investment, but I could be wrong.

^^ Effectively this. My concern is that if everyone is in the passive investing boat then we're no longer following the market, we're making the market, and it's a big departure from the philosophical under-pinnings behind the idea of passive investing. (We started out letting active players make the market by placing good/bad bets and winning/losing. We got a market that was at least trying to find the right price a…

what's a good hedge against this?

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#237

Post by tryitnow » Wed, Apr 19, 2017, 4:04 PM UTC

headmelted wrote: post #125

As a Vanguard customer, I can understand why people are so enthusiastic about their products, and have known for a while that passive investment, and Vanguard in particular, was growing while active management was on the decline. At no point did I think the difference in inflows was anywhere close to 8.5x. And it does worry me. I'm familiar with the contention that even having some active players in the market will a…

It's been a looong time since I've studied financial economics but I do think there's an active research literature around this topic (under the topic of market microstructure maybe?).

If I recall correctly (and again, it's been a while), I think the amount of passive funds has to be quite substantial for markets to be really bad at reflecting value over the long run.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#238

Post by hesdeadjim » Wed, Apr 19, 2017, 4:07 PM UTC

zeroer wrote: post #223

hesdeadjim wrote: post #215

Earlier quoted context omitted.

Oh gotcha with the cost basis raising over time. I wonder what strategies you could use to mitigate that. Perhaps buying a similar asset, holding that instead of the other, wait for the original to go down, and then re-purchase. Seems fragile and risky of course...

> Perhaps buying a similar asset, holding that instead of the other, wait for the original to go down If you're presupposing the assets are similar, this is unlikely to happen to any significant degree. The standard way to increase your odds of being able to tax loss harvest is to own as many different uncorrelated securities as possible. You can take this to mean a fund per industry (as Betterment and Wealthfront do…

What about the effect of a (let's be honest, inevitable) market crash? You'd be able to realize quite a bit of loss as that is happening by selling assets. Then as the market recovers and assuming those assets are actually worth more than the crash-adjusted value, you would be able to harvest losses again on that asset.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#239

Post by kolbe » Wed, Apr 19, 2017, 4:08 PM UTC

Paul-ish wrote: post #208

kolbe wrote: post #162

Earlier quoted context omitted.

> the less active money there is around, the less accurate our concept of a correct value can be The problem is deeper than that. Active shareholders actually give a shit about corporate governance. Collectively, they put honorable and competent people on the board of directors, and make sensible decisions when other issues are put to shareholder votes. Vanguard and other indexing funds could barely care. Their incen…

Some researchers have looked at the effect of passive investors on corporate governance[1] : > Still, these funds retain the power of voice, the ability to exert shareholder influence on management and governance-related proposals. But critics say passively invested funds, with their lower fees, lack the resources and often the will to monitor their large and diverse portfolios. The Economist calls them “lazy investo…

I don't know how to say this, but I would trust a common sense understanding of human behavior over research. If there's one rule in life, it's that high finance will exploit legal and immoral loopholes to accumulate wealth, and there is plenty of opportunity for that here, despite the rigorous academic studies done by an institution that is highly connected to the people who can profit off of it.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#240

Post by lr4444lr » Wed, Apr 19, 2017, 4:08 PM UTC

alex8022 wrote: post #225

lr4444lr wrote: post #176

Earlier quoted context omitted.

I don't understand the fear. If index funds dominate the market to the point of a near risk-free rate because that's what everyone's doing, you've effectively democratized the capital system to the benefit of the regular joe: companies still turn profits, and those become dividends. Dividends are why we buy stocks. That's what drives the whole system - not a zero-sum bilking of active investors. Yes, major growth spu…

But then, say you come a long with a new company going public... you're not large enough to be in the S&P 500, so if everyone only invests in S&P 500 index funds, no one will buy your stock. Similarly, if you're Apple (the largest company), and you have a really bad quarter, say you lose $100B, no one would sell your shares, because they're passive investors. Obviously, these are edge cases (we'll never be 100% passi…

It's a perfectly valid question. In my very cautious humble opinion, I think what it means is that the style/size matrix[0] will get squeezed more into a single spectrum: large companies will be pressured into stabilizing and delivering dividends and small ones will compete to grow large enough to get a piece of the passive investment gravy train. Apple can have a bad quarter, but it's just one company. It can't keep having a bad quarter. And if they start to and have to downsize to stay alive, they would by doing that hasten themselves out of a market cap that would qualify them for the index.

There's also no reason why passive indices have to reflect the total market weighted for market cap.

[0]https://corporate.morningstar.com/US/documents/MethodologyDo...