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I'm Too Risk-Averse for Index Investing

paranoidvalueinvestor.substack.com

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Re: I'm Too Risk-Averse for Index Investing

#251

Post by Thrymr »

twobitshifter wrote: post #228
Thrymr wrote: post #188

This idea that even professional money managers, let alone amateurs with their own retirement funds, can consistently beat a market index has been debunked for decades by Jack Bogle, Burton Malkiel and others. There is still no good evidence that anyone (no, not even Warren Buffet) can reliably beat the market, and even if there were, you as an average investor would have no chance of identifying them before the fact…

Your statement about no investors beating the market is demonstrably false. Look at Michael Burry for example. What the statements about index funds say about is the average investor, not the atypical high performer. The argument is also weakened by $0 commission trading which did not exist when those studies were being done. https://en.m.wikipedia.org/wiki/Michael_Burry > After shutting down his website in November…

Fair enough, but it is hard to find the next Burry or Buffett!

Re: I'm Too Risk-Averse for Index Investing

#252

Post by maigret »

bumby wrote: post #11
impostervt wrote: post #2

Buying value stocks may be better than buying an index, but identifying value stocks is hard and time consuming. Wouldn't the average investor be better off buying index funds, since the average investor does not have the time, inclination, or training to find value stocks?

A potential interesting alternative comes from the low-volatility anomaly. Stocks that demonstrate low volatility tend to over-perform over long stretches of time. So if one was able to invest in low-volatility index funds, the article's author would theoretically be able to avoid the massive bubble swings while still potentially beating the market (albeit probably not by large margins).

You might be confusing volatility and growth here. One doesn’t imply the other.

Re: I'm Too Risk-Averse for Index Investing

#254

Post by bumby »

jackbravo wrote: post #246
bumby wrote: post #222

Earlier quoted context omitted.

> individual stocks also have the same systemic risk What do yo mean by the "same" systemic risk? Yes, all stocks have some systemic risk, but at varying levels as measured by beta. I wouldn't say that's the same. That's like saying all sports have the same injury risk. Sure, there's some inherent risk in every sport but at varying levels. There's an older investment technique called "betting-against-beta" that selec…

He probably means that a systemic risk is a risk for the whole system, like the Russian and Ukranian stock markets now that they are at war.

Oh, ok. That's confusing because systemic risk in finance is the measure of how much a stock tracks the market. E.g., if the market goes down X, how much will my index fund go down.

I read the comment as "an index fund perfectly tracks the market". Some are designed to do that, but others are not. Saying they all have the same systemic risk is demonstrably untrue because they don't all have a beta = 1.0

Re: I'm Too Risk-Averse for Index Investing

#255

Post by luckman212 »

dragosmocrii wrote: post #178
oliv__ wrote: post #166

Earlier quoted context omitted.

"Investing is heavily biased for favoring large players" How?

If you have 1000$ to invest and it appreciated 7%, that made you a 70$ profit, which is not much from a coat of living perspective. If you had 1,000,000$ to invest, that gives you 70,000$ profit, which is pretty good at covering living expenses, bit not leaving you much else. Now if you have 10,000,000$ to invest that yields 700,000$ in profit, that is marginally way more and covers living expenses, plus gives you ro…

TL;DR—being rich is better than being poor.

Re: I'm Too Risk-Averse for Index Investing

#256

Post by maskil »

lottin wrote: post #117

This is not very good advice. An index investor is exposed to systemic risk, that is, risks that affect the market as a whole, but the problem is you can't escape systemic risk by investing in individual stocks, because individual stocks also have the same systemic risk... in addition to other risks which are collectively known as idiosyncratic risk. In short, stock-picking is always inherently more risky than index…

His point is that value stocks are less affected by those systematic risks

Re: I'm Too Risk-Averse for Index Investing

#257

Post by benreesman »

I’ve never understood why so many non-professional investors are like making a case to the Internet that they should be stock picking.

Very serious hedge funds beat SPY by however much grey edge they have, in spite of much better information, financing, execution, and focus. Beating the indices is hard.

Playing the market is fun! People like doing it, and sometimes they come up. It’s fine. But arguing that some random person with a Schwab account has lasting alpha is just sufficiently implausible to border on silly.

Re: I'm Too Risk-Averse for Index Investing

#258

Post by sacado2 »

marcosdumay wrote: post #192
oliv__ wrote: post #166

Earlier quoted context omitted.

"Investing is heavily biased for favoring large players" How?

Between fixed cost fees, things that are sealed behind an accreditation process, investments that need real person to person negotiation, opportunities that aren't widely published, and even data that isn't shared with anybody that shows up, I'm really surprised that anybody can be even be mildly surprised by that phrase. There is absolutely no investment transaction where it's not obvious that larger players have it…

OTOH, as soon as you're a very big investor, you can't really invest a ton of money in, say, a small, discounted stock. Let's say you have ten billions to invest and you find that cute little company at an incredible discount, with a market value of 100 million bucks. Just investing 0.5% of your capital in that stock would mean buying half the company, which would make its price raise dramatically (if it were at all possible). But if you only had 100 millions to invest...

I'm pretty sure I've seen Buffett say more than once something like "if only I didn't have all those billions to invest, I would be able to make more money".

Re: I'm Too Risk-Averse for Index Investing

#259

Post by FredPret »

disambiguation wrote: post #230
FredPret wrote: post #63

Earlier quoted context omitted.

Maybe it goes up because the businesses it represents keep making more money? And they make more and more money thanks to the exponential forward march of technology, thanks in part to the people on this forum. This has held true through thick and thin from the Industrial Revolution on

let's be sure to also give thanks to inflation and cheap over seas labor!

Inflation causes a rise yes but profits have been going up even faster.

That cheap labour isn’t so cheap anymore either, all those Eastern sweatshops are starting to compete for workers, driving wages up

Re: I'm Too Risk-Averse for Index Investing

#260

Post by bumby »

maigret wrote: post #252
bumby wrote: post #11

Earlier quoted context omitted.

A potential interesting alternative comes from the low-volatility anomaly. Stocks that demonstrate low volatility tend to over-perform over long stretches of time. So if one was able to invest in low-volatility index funds, the article's author would theoretically be able to avoid the massive bubble swings while still potentially beating the market (albeit probably not by large margins).

You might be confusing volatility and growth here. One doesn’t imply the other.

Can you help me understand what you mean?

The low-volatility anomaly shows that investing in low volatility (low risk) assets tend to outperform over long stretches of time. It's a counter-intuitive result (hence being an anomaly) because the CAPM says lower risk assets should provide lower rates of return. So, as I understand it, the CAPM does imply volatility should correlate with returns because the risk-premium is weighted by beta.

I.e., low volatility stocks tend to be low beta stocks. lower beta implies lower returns under CAPM. The anomaly contradicts that model

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