51–60 of 94 posts
2 words: Renaissance Technologies http://en.wikipedia.org/wiki/Renaissance_Technologies
1) They're a huge, huge outlier
2) Any of Renaissance's funds are not nearly as scalable as a passive index fund
3) As a hedge fund will still take a big chunk out of returns as fees
Earlier quoted context omitted.
The argument against market timing I've always liked comes from Malkiel's Random Walk : > During the decade of the 1980s, the Standard & Poor's 500 Index provided a very handsome total return (including dividends and capital changes) of 17.6 percent. But an investor who happened to be out of the market and missed just the ten best days of the decade—out of a total of 2,528 trading days—was up only 12.6 percent. [...]…
Why is it that no one ever does the same analysis for the 10 worst days?
Invest in S&P 500 ETF (SPY) starting at inception
Growth of $100,000 from 1/29/1993-8/30/2010
Buy and Hold: $324,330.15
10 Best Days Removed: $156,354.12
10 Worst Days Removed: $692,693.90
10 Best and 10 Worst Days Removed: not listed, but very close to Buy and Hold (the green line in the chart)
“Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S & P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.” - Warren Buffet http://www.longbets.org/362
This argument is wrong? edit: it's like saying this about strategies of chess players, one group is using strategy A and another is using strategy B:
Chess players using strategy A are known to perform about average (by the nature of their strategy). So this new strategy, B, has to perform about average too.
This neglects that there are other strategies than A and B. The whole world is not either passive investors or hedge funds.
And he's saying something even stronger: there is no subset of B players that is better than average.
So while he may well be correct in his prediction, he makes it sound like he has a mathematically tight argument for why he is correct. But the conclusion of his argument (that active investors will perform about average) is not the prediction of his bet (that hedge funds will perform about average, and because they have higher operating cost they will lose).
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…
I index for a very good reason, some of the smartest people I know chose to work on Wall Street, and they're putting in 60+ hours a week working on this stuff. If you have tens of thousands of people like that, I don't care how smart you are you just aren't going to beat them. Better to insure you are at least average (which net fees probably puts you in the top 30%) than to chase being in the top 5% and failing miserably.
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 fa…
2. Of course if fund is derivative based all risks associated with derivatives come into play for fund investors. Same is true for any securities that are owned by funds - their risk is transferred to shares of fund. But I think you're familiar with risks associated with equity investing.
3. Maybe, maybe not, depends on stocks and market conditions. Of course the company is "more valuable" if it's included in some popular index like S&P, but then again ETF's and funds can make purchases wholesale, so there might be some benefit too.
4. Yes, but since traditional non-derivatives based funds are linked 1-to-1 to underlying shares, I don't see a huge problem. Unlike with derivatives-based funds.
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?
1) The world is getting bigger over time.
2) The world's industry, per capita, is getting more valuable over time.
3) Even if the first two were untrue, there is still a time value to money. People will spend capital to get value immediately, and investing is the opposite of that.
Earlier quoted context omitted.
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 fa…
1. read the prospectus. if the fund is comprised of stocks as opposed to derivatives it will be comprised of stocks. Of course fund will only buy whole and large amounts of shares, so say you put 1 ETF share worth $100, the fund won't be hurrying to buy shares with it, until they got $1000000 to start buying wholesale. 2. Of course if fund is derivative based all risks associated with derivatives come into play for f…
The ETF will actually never buy the shares. You can only buy existing ETF shares from other traders.
ETF shares are created by large financial institutions - JPM/GS/other big players have the option to make an in-kind trades of share in securities for ETF shares. I.e., if an ETF is 50% MS and 50% AAPL, a large trader can trade 50k shares of AAPL and 50k shares of MS for 100k shares of the ETF. (Similarly, they can perform the reverse trade.)
Earlier quoted context omitted.
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."
Check out http://alphaclone.com/
You have to pay for a membership but the site is top notch. They parse investment fund's sec filings and allow you to backtest strategies to see how well they would have performed over a given time frame. You will find strategies that crush any index fund.
I am not affiliated with alphaclone.com.
Earlier quoted context omitted.
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 one…
> 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 am a software developer. Am I not successful because I dont own personal airplanes and a private island? I don't think these things define my success. Regardless, you have provided a straw man argument.
The people I know who are successful traders all have different MOs. What defines there success is that they stay in the black. Hence, they are able to time the market.
You don't need minimum latency to the exchange, fastest computers, insider info. As an example check out the performance of Fund My Mutual Fund. This is a virtual mutual fund that is soon to launch for real.