271–280 of 358 posts
I seems like there should be an opportunity for active investors to make money off of all the passively managed money. All I can think of would be to take advantage of the margin of the index. For example buy stock #501 and a discount and sell when it crosses into the sp 500 since vanguard will prop up the price by buying it for tge index fund. Similarly shorting #499. I'm sure that the market has gotten more sophist…
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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…
If the Efficient Markets Hypothesis (in its stronger forms) is false, there should be managers who are able to identify the cheapest stocks within the S&P 500 and thereby outperform the index. A disbeliever in EMH should look to identify these managers and pay them some fee, rather than simply investing in the index and trying to minimize fees. I think it's plausible that these managers exist, but they're impossible…
In the next breath you say that even if the EMH is false "individuals investors should act as if it were true".
This makes your post somewhat ambiguous; not so clear about which position you're advocating. How "plausible" is it that these managers are "impossible to identify ex ante."? Why is it plausible? "Impossible" seems like a pretty strict standard (akin to strong EMH), why not just say instead that identifying such managers before they outperform is "practically impossible" or just "really, really, damn hard and something that you're deluding yourself about if you think you can do it."
Also (assuming it is your position), it's important to clarify that you don't disagree with the assertion that many people do identify market-beating managers before they outperform. Probably millions of people have done it; it happens every day. What they don't do (in my opinion) is use skill or knowledge to identify the outperforming managers. If they do identify an outperforming manager (of which there are always many) it happens because of chance or luck. (Just as, IMO, the outperformance itself of almost all outperforming managers is due to luck or chance, not skill.)
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…
I think you have identified that this is a self-correcting problem but are selling yourself short by thinking that the economy will be destabilized. If everyone goes towards passive investments, there will be huge opportunities in active investment because the passive investing is not correctly identifying value. These opportunities are likely to cause an outflow from passive into active if that is where the money is…
Sure. But it's unclear where the equilibrium is between the volume of passive investing and the volume active investing (or if there is one).
In the meantime, the increasing share of passive investment is causing the prices on all these assets to become more correlated. This increases systemic risk. When everyone diversifies completely, you lose the benefits of diversification.
It's unclear to me how well investors recognize this shift in systemic risk. Obviously there will always still be some active investors. But how can you be sure that the economy won't be destabilized from this?
No mentions of ETFs? SPDR is not a mutual fund company.
> Already, six out of the 10 largest mutual funds by asset size belong to Vanguard, with the largest, Vanguard Total Stock Market Index, now weighing in at $465 billion, according to Morningstar.
The elephant in the room is ETFs like SPDR. SPY (SPDR's largest fund) has $230 Billion in assets. It isn't quite as big as Vanguard, but clearly SPY needs to be mentioned.
The silence is deafening. "Classic" active mutual fund companies may be dying, but a new breed of investing has already begun... and its competing against Vanguard quite gloriously. Low cost, quickly traded, with large numbers of derivatives: ETFs.
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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.
Take a look at this chart of the SP500 over time: http://www.macrotrends.net/2324/sp-500-historical-chart-data (Make sure to turn off inflation-adjusted) I think you'll see that in the last 90 years, even the worst market crashes don't take the index down to a level lower than what it was 15 years prior. To put it another way, pick any time in the past 90 years, the S&P 500 is always higher 15 years later than that d…
Like I said though, I have seen very significant returns from my loss harvesting. Even without a yearly source of capital gains, it definitely does not hurt to collect the losses and use them later in life (for instance if you sell an investment property).
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Great explanation! Thanks! >> So to answer your questions, in a flash crash scenario as an ETF owner you'll experience more lag in both cases So the lag is due to inability to quickly buy/sell the percentages that were allocated for different stocks to build a share, right? And if I understand correctly, this means if people keep their emergency funds in ETFs, in a crisis, they probably won't be able to access those…
Authorized participants (APs) exist for all ETFs. their purpose is to make sure that the ETF mirrors the underlying assets, and to provide liquidity. Consider a ETF that consists of a single stock. IF the stock drops, the AP will lower its Bid/offer spread, and force the ETF down to the same level as the stock. But as this is a reaction to the stock falling, there is going to be a lag between the stock falling, and t…
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It's not necessarily active vs passive. It's skin in the game vs no skin. Low fee index funds offer no incentive for the managers to do any actual managing. They follow an equation, and collect a few bps.
Yes, it's not even that simple. It's about having enough skin on the game. No big fund manager has enough skin on the game. That has been true for most of last century and all of the current one, and the expected results are visibly there.
If all vanguard does is buy (not pick) stocks for you, why wouldn't you just skip the fee and buy the stocks yourself?
1. Most of the people just want to set their allocation and no think about it more than a few times a year. 2. Without Vanguard(and other index funds), you do not quality for admiral shares. 3. Vanguard's fees are among the lowest(last time i checked it was between 0.1-0.5%). There is no charge for buying and selling Vanguard funds. 4. Vanguard is non-profit. ~I am no way affiliated with Vanguard.
Vanguard is a company like any other for-profit, with the distinction that Vanguard's own shares are being held by the funds it manages, so increasing fees, e.g., would probably decrease share holder's value.
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> 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...
If the majority of the market is passively rebalancing, does the true value matter or does the weighting swamp it?
I see how one would make money on arbitraging pre- and post-90s mandatory rebalancing by major passives. I'm less clear on how one arbitrages difference between the prices passives are investing at and a "true" price.
someone explain "reversion to the mean" I don't understand it.
In the stock market this means that looking over a short timespan one will see large variance in the returns but over a long timespan (30+ years) the returns will be more consistent and nearly all positive.