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

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#301

Post by ethbro » Wed, Apr 19, 2017, 6:45 PM UTC

ctkrohn wrote: post #262

malchow wrote: post #197

Earlier quoted context omitted.

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…

> I think it's plausible that these managers exist, but they're impossible to identify ex ante. Furthermore, a smart manager will charge fees that are equal to the alpha they generate.

I think this is the kernel of what Bogle was saying and Vanguard is now reaping the benefits of.

Old system: active traders beat the market, therefore they charge fees slightly less than the alpha they're supposed to generate

New system: customers are more aware that their active trader(s) may not be the winners, so the acceptable fee to pay the traders decreases to the product of the alpha AND the risk of not picking the right traders

https://www.zacks.com/stock/news/250937/warren-buffett-on-ac...

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#302

Post by kgwgk » Wed, Apr 19, 2017, 6:45 PM UTC

ethbro wrote: post #279

scrooched_moose wrote: post #231

Earlier quoted context omitted.

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...

I think the question might have been what a "systemic mispricing of 0.1%" means. 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.

> passively rebalancing

What does that mean?

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#303

Post by jessriedel » Wed, Apr 19, 2017, 6:48 PM UTC

sigstoat wrote: post #284

jalopy wrote: post #220

Earlier quoted context omitted.

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

That's not what active management is. "We believe that our active engagement demonstrates that passive investors don’t need to be passive owners." https://about.vanguard.com/vanguard-proxy-voting/

To clarify for other: the distinction is between (1) active choice of what stocks to buy and (2) active voting as a shareholder.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#304

Post by kgwgk » Wed, Apr 19, 2017, 6:53 PM UTC

bluGill wrote: post #224

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…

Vanguard is not as passive as you think. they don't trade often, but they do trade. Their S&P500 fund doesn't just hold stocks in the S&P500, it also holds other stocks that could have been but S&P500 had S&P not limited the index to 500 stocks. Vanguard fund managers regularly make active decisions on what stocks to buy/sell. Vanguard is not nearly as active is most mutual funds, but they are not entirely passive ei…

Vanguard offers a range of products. Some do really hold the stocks in the benchmark. "Vanguard S&P 500 ETF is an exchange-traded share class of Vanguard 500 Index Fund. Using full replication, the portfolio holds all stocks in the same capitalization weighting as the index."

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#305

Post by SwellJoe » Wed, Apr 19, 2017, 6:54 PM UTC

hueving wrote: post #108

SwellJoe wrote: post #89

Earlier quoted context omitted.

I don't understand how companies like that can thrive (but many do). If I have to pick up the phone to solve a problem even once, I'm angry. If I have to call them twice, I'm looking at alternatives. I may decide not to switch if the alternatives are even worse...but, I'm looking to get out of the shitty relationship I find myself in with that company. (This frustration is fresh in my mind because Security Metrics ju…

You can't really switch 401k providers when your employer picks them.

Every time I've had a 401k provided by work, there were multiple options from multiple providers. Is that not common?

That said, we probably agree that it's a market without a lot of competitive pressure, and that often results in poor customer service (just as in the case of telcos).

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#306

Post by ctkrohn » Wed, Apr 19, 2017, 6:55 PM UTC

nradov wrote: post #299

ctkrohn wrote: post #262

Earlier quoted context omitted.

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…

Logically even if the EMH is false that doesn't necessarily imply the existence of investment managers who can reliably identify mispriced securities. It's entirely possible that the EMH is false and yet no one is able to take advantage of that. But your recommendation makes sense either way.

Right, those anomalies could simply exist unexploited until the market is better understood. For example, you used to be able to earn money buy buying the 501st largest company in the US: if it happened to become the 500th largest, all the S&P 500 index funds would be forced to buy its stock, and it would outperform the other stocks that had already been in the index. Similarly, the 500th largest stock would be a good sale candidate: if it becomes the 501st largest company, the index funds will become forced sellers. Now this effect is very well known, and there's no more money to be made by exploiting it.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#307

Post by jessriedel » Wed, Apr 19, 2017, 6:55 PM UTC

jackcosgrove wrote: post #251

bluGill wrote: post #224

Earlier quoted context omitted.

Vanguard is not as passive as you think. they don't trade often, but they do trade. Their S&P500 fund doesn't just hold stocks in the S&P500, it also holds other stocks that could have been but S&P500 had S&P not limited the index to 500 stocks. Vanguard fund managers regularly make active decisions on what stocks to buy/sell. Vanguard is not nearly as active is most mutual funds, but they are not entirely passive ei…

Active and passive are just marketing labels. The frequency of trades should be correlated with the expense ratio. If you do more trades, you better be hiring more analysts to figure out those trades. Vanguard has lower costs because it employs fewer people to execute fewer trades. That's all I really care about.

Expense ratios for actively managed funds aren't that tied to trading frequency, I don't think. Most of the cost goes to paying for research, and that can be for positions held on all time scales. Someone picking a handful of blue chip stocks based on fundamentals is still definitely "active investing" even if they buy and hold for a long time.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#308

Post by SwellJoe » Wed, Apr 19, 2017, 6:55 PM UTC

obstinate wrote: post #144

SwellJoe wrote: post #89

Earlier quoted context omitted.

I don't understand how companies like that can thrive (but many do). If I have to pick up the phone to solve a problem even once, I'm angry. If I have to call them twice, I'm looking at alternatives. I may decide not to switch if the alternatives are even worse...but, I'm looking to get out of the shitty relationship I find myself in with that company. (This frustration is fresh in my mind because Security Metrics ju…

You should not get angry over such small things. Not good for your health, or for any other purpose.

I try to choose service providers that won't demand I talk to them on the phone. It works out OK. I very rarely have to talk to strangers on the phone.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#309

Post by jessriedel » Wed, Apr 19, 2017, 7:06 PM UTC

subroutine wrote: post #111

cJ0th wrote: post #100

The fact that Vanguard is growing faster than everybody else combined is interesting indeed. The article itself, however, reads like one big ad for Vanguard. The fact that the NYT is somewhat affiliated with them ("They number well over 20 million and include New York Times employees: Vanguard runs the company’s 401(k) retirement plans.") doesn't help either. What I miss is a critical examination of the situation. Th…

Pardon my ignorance, but how would NYT directly benefit from a boost in Vanguard popularity? Say this article somehow elicits a bevy of people/companies to invest in Vanguard, raising their mutual fund from $4.2 to a $4.5 trillion. Given that NYT stake in this fund remains constant, it's not clear to me how this helps NYT employees - unless $4.5 trillion is the tipping-point for market manipulation (but isn't this fu…

Vanguard gives discounts to large institutions. If a NY Times story helps Vanguard, Vanguard could cut their rate a bit.

I don't think this is likely, but I think it's clearly possible, and noting this potential conflict of interest seems prudent. This is what the disclosure is for.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#310

Post by Chaebixi » Wed, Apr 19, 2017, 7:12 PM UTC

SwellJoe wrote: post #295

Chaebixi wrote: post #254

Earlier quoted context omitted.

> If I have to pick up the phone to solve a problem even once, I'm angry . > If I have to call them twice....I'm looking to get out of the shitty relationship I find myself in with that company. [emphasis mine] You are way too sensitive and demanding, IMHO. You're probably a developer: is this how you want people thinking of you when you inevitably push a bug? I can understand looking elsewhere after a pattern of pro…

I wasn't saying anything about demanding perfection. I was saying that talking to someone on the phone is the worst customer service experience in common use. It is because I have empathy for the person on the other side that I'm angry at the corporation for making me have a conversation I really don't want to have. I am always nice to the person I speak to, despite being angry at the company they work for for wastin…

> I was saying that talking to someone on the phone is the worst customer service experience in common use.

I disagree with that pretty strongly. The phone is the second-best method for communicating a complex or unusual problem, only behind a face-to-face meeting.

Anyway, the worst customer service experience in common use is actually the fixed-option support menu (that usually obscures how to contact a real person).

The real determiner of good customer service is how the process was designed and how empowered the representatives are to fix your problem. Case in point: Amazon's famous customer service. I had an unusual problem with an order recently. Their chat support utterly failed to help me after several tries, leaving me very frustrated. Their email support couldn't help me either, but explained I needed to call. It turns out only their phone support is empowered to escalate things to someone who could help, plus the it was much easier to relate my issue to them. None of that frustration had anything to do with the phone vs. chat vs. email, but everything to do with Amazon's (poor) support choices.

> My anger is over the fact that I've been given no option but a phone call.

I can understand feeling frustration at that, but not anger.