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The best investment advice you'll never get

sanfranmag.com

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Re: The best investment advice you'll never get

#21

Post by nandemo »

weber88 wrote: post #10

Just a question that popped into my head: what would happen if everyone followed a passive strategy, ie, no one was active? Isn't some sort of active strategy required, somewhere, for funds to be directed at all? Though, I do think on average fund managers probably don't actually make anything like useful predictions. But perhaps we do need someone, somewhere, looking for good investment. My guess is that there is a…

As you suggest, we do need "value traders". In particular we need traders who buy and sell stocks in reaction to news. These traders don't have to be necessarily the active fund managers the article is talking about. They could be prop traders working for their own account or for a bank, broker or hedge fund.

"News" is any new information that affect the expected present value of a company cashflow. It could be a new product, a possible merge or macroeconomic indicator.

If you invest in an index fund, you're basically following the trades of those value traders. You won't make as much money as them, because often you'll be buying "good" stocks after they've already increased in price, i.e., by the time passive fund managers buy the "good" stock, the price will often have already incorporated the value of the good news. The same holds for the "bad" stocks.

Re: The best investment advice you'll never get

#22

Post by rdtsc »

JSig wrote: post #7
flyt wrote: post #4

Earlier quoted context omitted.

it's impossible to time the market, so instead you use dollar cost averaging to invest at a constant rate, regardless of how things are in the market. put money in both when it's expensive and cheap to do so.

I certainly disagree with you that it is impossible to time the market. There are many forms of technical, statistical and fundamental analysis that help to time the market. A key element to trading is removing emotional bias. I am aware of many people that are successful traders. I will note that the market is much different today than it was in 2004. Today HFT accounts for 70% of volume. That is huge. I think havin…

> I certainly disagree with you that it is impossible to time the market. ...

> I am aware of many people that are successful traders.

You have to ask then if they own personal airplanes, yachts and private islands? If the answer is 'no', then you have to wonder why not?

I think the problem is that individual successful traders are just traders who are randomly successful. You hear about them because they are the ones that get lucky and brag about it. Those who are unsuccessful will probably remain forever anonymous to the public and even their friends.

The only ones that can "beat" the market are the ones that do it via technical means (minimum latency to the exchange, fastest computers, insider info, etc.) I think these are just the large investment banks.

Re: The best investment advice you'll never get

#23

Post by hardik »

jerf wrote: post #9
adamjernst wrote: post #2

A well-written article, but really? Investing in a low-cost broad index fund is the /only/ investment advice I get nowadays.

Having also read this a lot, it makes me wonder how the clever financial world will find a way to take a lot of people owning index funds and somehow fleece them. I also find myself pondering the macroeconomic effects of a lot of the market simply being in index funds, though I'm sure we're a long ways from that. My personal rule-of-thumb "By the time you've heard of it, it's too late to get in on it" is also trigger…

The recent surge of high frequency trading is in some part just that (fleecing of index funders) since these guys try to extract value from all trades happening in the market (and index funds will do some trades, albiet fewer than active funds)

Re: The best investment advice you'll never get

#24

Post by tomsaffell »

lotharbot wrote: post #19
flyt wrote: post #4

Earlier quoted context omitted.

it's impossible to time the market, so instead you use dollar cost averaging to invest at a constant rate, regardless of how things are in the market. put money in both when it's expensive and cheap to do so.

> "it's impossible to time the market" That depends very much on exactly what you mean by "time the market" . It is impossible to reliably predict whether the market will go up or down on any given day. It is also impossible to reliably predict exactly when a market will hit a peak or trough. Dollar-cost averaging is a great strategy to reduce the risk associated with the inability to "time" markets in this sense. Bu…

Agreed - I believe there are some ways to time the market. For example, if you want to make a 5-10 year investment, then doing so in the S&P500 when it is significantly down will yield better returns (on average) than doing it at a random time: http://saffell.wordpress.com/2008/10/26/does-timing-the-mark...

Re: The best investment advice you'll never get

#25

Post by philfreo »

Interesting comment on that article:

Index investing (applied to extremely wide market indexes) makes an assumption that there will be a continuous and infinite increase in the total market capitalization of that index. As time marches forward I beleive we will experience a deceleration of worldwide market cap increase.

Anyone have thoughts on this?

Re: The best investment advice you'll never get

#26

Post by brisance »

dkarl wrote: post #18
weber88 wrote: post #10

Just a question that popped into my head: what would happen if everyone followed a passive strategy, ie, no one was active? Isn't some sort of active strategy required, somewhere, for funds to be directed at all? Though, I do think on average fund managers probably don't actually make anything like useful predictions. But perhaps we do need someone, somewhere, looking for good investment. My guess is that there is a…

The advice against trying to beat the market is based on the fact that there are tens of thousands of highly intelligent people paid to analyze securities, and they're all feeding off each other's behavior. To beat the market, you have to beat a conventional wisdom based on the accumulated expertise of a lot of people. For instance, if you want to buy stock in a Malaysian steel company, you have to decide that you un…

Or maybe the "analysts" are just not any good.

For a specific example, look at how the "hobbyists" are beating the "professional" analysts at predicting Apple's quarterly performance, time and time again.

http://tech.fortune.cnn.com/2010/04/20/apples-blow-out-quart...

Re: The best investment advice you'll never get

#27

Post by nradov »

WildUtah wrote: post #14
jerf wrote: post #9

Earlier quoted context omitted.

Having also read this a lot, it makes me wonder how the clever financial world will find a way to take a lot of people owning index funds and somehow fleece them. I also find myself pondering the macroeconomic effects of a lot of the market simply being in index funds, though I'm sure we're a long ways from that. My personal rule-of-thumb "By the time you've heard of it, it's too late to get in on it" is also trigger…

take a lot of people owning index funds and somehow fleece them There are strategies to do this now, but they're hard to execute. One example is to target stocks that are likely to enter or drop off indicies. Index funds will be looking to buy or sell them soon. Mostly these strategies depend on your ability to set up a very high speed link to the computers that clear trades and interpret the algorithms that index fu…

This was covered in a WSJ article yesterday. http://online.wsj.com/article/SB1000142405274870400870457563... "Over the long run, sharp traders getting out in front of these forced portfolio changes have poached at least 0.38 percentage point of annual return away from Russell 2000 index funds, estimates a new study in the Journal of Empirical Finance."

Re: The best investment advice you'll never get

#28

Post by akg_67 »

philfreo wrote: post #25

Interesting comment on that article: Index investing (applied to extremely wide market indexes) makes an assumption that there will be a continuous and infinite increase in the total market capitalization of that index. As time marches forward I beleive we will experience a deceleration of worldwide market cap increase. Anyone have thoughts on this?

I have several concerns with index fund/ETF investing:

1. How much of the underlying stocks, that make up the Index, are really owned by the Index fund/ETF? I doubt that such funds/ETF actually own 100% of the required underlying stocks, may be using some sort of option/hedge strategy.

2. In what scenario, not owning the actual underlying stocks can be detrimental to index fund/ETF? I am looking for what may cause failure of such funds/ETF and who may lose.

3. Is index fund/ETF investing artificially inflating price for underlying stocks compared to price of the rest of the non-index stocks in the market?

4. Can index investing cause Index "Bubble"?

Re: The best investment advice you'll never get

#29

Post by paraschopra »

philfreo wrote: post #25

Interesting comment on that article: Index investing (applied to extremely wide market indexes) makes an assumption that there will be a continuous and infinite increase in the total market capitalization of that index. As time marches forward I beleive we will experience a deceleration of worldwide market cap increase. Anyone have thoughts on this?

This has crossed my mind a lot of times and I think the comment is right - market capitalization of index cannot increase to infinity. There is a finite number of companies that the Index is comprised of and there has got to be a theoretical upper limit to that.

Moreover, the investment psychology also comes into play here. The growth rate of index may slow down as it becomes large because investors always compare today's index with the previous values and are likely to conclude that the index is "over-valued" if it keeps rising.

I'll be curious to find evidence of deceleration as the index value rises.

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