Bogle Sounds a Warning on Index Funds • Hacker News Board

Re: Bogle Sounds a Warning on Index Funds

#131

Post by jandrese » Fri, Nov 30, 2018, 7:17 PM UTC

throwawaymath wrote: post #113

koboll wrote: post #40

Earlier quoted context omitted.

As an "active investor" your competition is HFT algos on servers located as physically close as possible to the stock market in order to achieve superhuman reflexes. Which you have absolutely zero hope of beating. I'd rather see slower, predictable gains than bet my nest egg trying to go toe-to-toe with hyperefficient machines -- or hand it off to some Manhattan finance bro making that bet on my behalf.

I'm going to upvote your comment because I don't think it deserves to be downvoted, and at the time of writing it's grayed out for me. That being said - you're incorrect about about competition between active investors and HFT. That's a common misconception. HFT primarily occupies a marketing making role, which means they try to play both sides of the spread very quickly for a very, very small profit on each trade. T…

HFT is basically a tax on each transaction that gets applied because you don't have as accurate a view of the market as the guy who is down on the wire. If you're strategically buying shares in a company and holding them then HFT is not your competitor.

If you're a day trader trying to flip stocks by holding them for a couple of seconds at a time HFT is why you're bankrupt.

But it's also not true that HFT folks create markets. To create a market you need to sit on shares and offer them for sale. HFT leeches off of existing markets. It's true they offer share for sale, but only ones they bought a few nanoseconds earlier for the original price.

Re: Bogle Sounds a Warning on Index Funds

#132

Post by saghm » Fri, Nov 30, 2018, 7:18 PM UTC

chimeracoder wrote: post #117

xenadu02 wrote: post #108

Earlier quoted context omitted.

Believe it or not, sometimes products are unloaded on one coast, transported by rail, then loaded on a ship on the other coast.

> Believe it or not, sometimes products are unloaded on one coast, transported by rail, then loaded on a ship on the other coast. That is surprising, since shipping by water is dramatically cheaper than any other form of surface shipping, even factoring the extra distance to sail down to the Panama Canal. What's the point of adding the land leg?

Speed, maybe? I don't know offhand if it's faster or not, but if it is, I can imagine that spending more to get the products to their destination faster could be worth it in some scenarios.

Re: Bogle Sounds a Warning on Index Funds

#133

Post by ethbro » Fri, Nov 30, 2018, 7:22 PM UTC

jandrese wrote: post #122

yourapostasy wrote: post #111

Earlier quoted context omitted.

> ...filled to the brim with sensors... Has someone actually worked out that tons of sensors will cost far less than people-driven trucks? As it is, fuel is the big cost, followed by driver salary [1]. L5 autonomous driving is not going to come cheap, that gear is going to price as close to 3X driver salary as they can get away with, on the assumption they can run close to around the clock. Whose margin is getting co…

Sensor packages and near-AI compute clusters constantly get cheaper as the technology improves. Today it doesn't make sense, but in 10-15 years when a full self-driving solution costs maybe $1k? It's a no brainer, especially for long haul trucking. I'd guess that putting a security guard on a truck will be an exceptional occurrence, probably only used when the truck is hauling an especially valuable cargo or going th…

Given: (1) sensors necessary to autonomously navigate, (2) large stretches of rural America (out west, maybe 100+ miles to the nearest police station), (3) adaptable human adversay, (4) no humans to injure on the vehicle

... I just don't see how you economically protect a vehicle (vs cargo value).

And more sensors simply mean more things to steal. The minimum law enforcement response time along your entire route is the real issue, and there's no way you decrease that short of drastically increasing police staffing.

Re: Bogle Sounds a Warning on Index Funds

#134

Post by ceejayoz » Fri, Nov 30, 2018, 7:25 PM UTC

chimeracoder wrote: post #117

xenadu02 wrote: post #108

Earlier quoted context omitted.

Believe it or not, sometimes products are unloaded on one coast, transported by rail, then loaded on a ship on the other coast.

> Believe it or not, sometimes products are unloaded on one coast, transported by rail, then loaded on a ship on the other coast. That is surprising, since shipping by water is dramatically cheaper than any other form of surface shipping, even factoring the extra distance to sail down to the Panama Canal. What's the point of adding the land leg?

Shipping via Panama doubles the distance, and it's probably half the speed as well. Some products will likely benefit from shaving off two or three weeks from China to the EU.

Re: Bogle Sounds a Warning on Index Funds

#135

Post by nostrademons » Fri, Nov 30, 2018, 7:27 PM UTC

mruts wrote: post #77

bluGill wrote: post #18

Earlier quoted context omitted.

The risk is because index funds don't do stock analysis (instead they buy and hold all stocks) they will invest in bad companies and prop their price up. Then when the bad company goes bankrupt (as everyone paying attention knows will happen) the index funds are left holding all the stock suddenly worth nothing. Which is to say the traditional more expensive managed funds that actually pay attention to the fundamenta…

This is not exactly true. Many (most?) indices are market cap weighted, so if a company’s stock is tanking (i.e, their market cap proportional to other tickers in the index is going down), the index will sell the shares. In my view, index funds aren’t really passive at all, they are crowdsourcing the best ideas of active management. This is why many indices (like S&P 500) produce pretty good returns. If you created a…

The point is that the stock won't always tank when they're doing something that'll negatively affect fundamentals, because too few people are actively researching & investing in the stock to affect the price. And then when a tipping point is reached and the stock price starts to go down, index funds will exacerbate the slide as they rebalance out of the falling stock and sell off its shares.

Normally markets remain efficient because they provide an incentive for people to actively research & surface all available information on a company's future prospects. If most people aren't doing this, then a.) the market price will be slower to react to bad information about the company and b.) people who do actively react will make larger profits, as they can trade on their information before the majority of the market takes it into account.

There's an equilibrium level of disequilibrium - as more people pursue passive investing, returns to active investors rise, until some of those passive investors realize they can make large profits as active investors, restore market efficiency, and destroy the profit potential of active investing. I'm not sure exactly where we are in that cycle, but there's some evidence that stock prices have become less volatile overall except for major news-related panics, which would be expected if a large proportion of people are passively investing.

Re: Bogle Sounds a Warning on Index Funds

#136

Post by fipple » Fri, Nov 30, 2018, 7:28 PM UTC

Glyptodon wrote: post #130

fipple wrote: post #119

The summary: if Coke and Pepsi are owned by different guys, Coke will take an action that makes them an additional $1 million, even if (especially if) it causes Pepsi to lose $1 billion. Most commonly, cut prices. If the two companies are owned by the same guy, they have the incentive not to compete with each other since their owner cares about the sum of their profits. This is why one wouldn’t be allowed to acquire…

Even without index funds the drive towards large portfolios and diversification would do the same thing. I'd go so far as to say that unified ownership of competing firms by large investors is just unhealthy in general. Not really sure what can be done about it though since many companies are rather multi-industry.

Well the idea of an index, whether done through a fund or not, is to buy some of each company. A value investing approach would be to find the better stock and invest in it, so Coke stockholders would rarely own Pepsi stock and vice versa.

Re: Bogle Sounds a Warning on Index Funds

#137

Post by nostrademons » Fri, Nov 30, 2018, 7:30 PM UTC

koboll wrote: post #40

alehul wrote: post #9

Earlier quoted context omitted.

Index fund investors are classified as "passive investors," while others are "active investors." The main investment risk to index funds growing is that, if everybody is a passive investor, then the passive investors are worse off as there are very few active investors who actually try and value companies appropriately. On the other hand, if the market is littered with active investors, then the market is likely more…

As an "active investor" your competition is HFT algos on servers located as physically close as possible to the stock market in order to achieve superhuman reflexes. Which you have absolutely zero hope of beating. I'd rather see slower, predictable gains than bet my nest egg trying to go toe-to-toe with hyperefficient machines -- or hand it off to some Manhattan finance bro making that bet on my behalf.

There are active investing strategies besides HFT. One example is Buffett-style value investing, where he picks a few good businesses with large moats and great cash flow and then holds them for decades. This is about the polar opposite of HFT (where you hold for seconds and don't care about the underlying business at all), but both fall under the general category of active investing.

Re: Bogle Sounds a Warning on Index Funds

#138

Post by _wp3r » Fri, Nov 30, 2018, 7:30 PM UTC

jandrese wrote: post #123

pmiller2 wrote: post #79

Earlier quoted context omitted.

Automated trucks don't necessarily have to be unmanned.

They do if you are automating them to avoid having to pay human drivers. It's kind of silly to go to all of the effort to automate a truck and then make someone sit on their thumbs behind the wheel for hours on end.

If you can reduce legal risk(accidents) by 50x or 100x and extend the road time by 2x or 3x, then paying a security person seems like a doable call. Especially if you can pass some of that premium risk mitigation on to the customer, if load value dictates.

Raw hourly cost may not even be the primary point under the manpower line of reasoning. It is certainly important, but not necessarily the key issue.

Re: Bogle Sounds a Warning on Index Funds

#139

Post by jandrese » Fri, Nov 30, 2018, 7:32 PM UTC

ethbro wrote: post #133

jandrese wrote: post #122

Earlier quoted context omitted.

Sensor packages and near-AI compute clusters constantly get cheaper as the technology improves. Today it doesn't make sense, but in 10-15 years when a full self-driving solution costs maybe $1k? It's a no brainer, especially for long haul trucking. I'd guess that putting a security guard on a truck will be an exceptional occurrence, probably only used when the truck is hauling an especially valuable cargo or going th…

Given: (1) sensors necessary to autonomously navigate, (2) large stretches of rural America (out west, maybe 100+ miles to the nearest police station), (3) adaptable human adversay, (4) no humans to injure on the vehicle ... I just don't see how you economically protect a vehicle (vs cargo value). And more sensors simply mean more things to steal. The minimum law enforcement response time along your entire route is t…

These thieves have to steal from a moving vehicle? Sure it's not impossible, but it's more Hollywood heist than something you'd see in real life. It will almost certainly happen a few times, but for practical purposes the amount of stuff stolen before the guys are caught will be less than what it costs to hire tens of thousands of rent-a-cops to sit in the backs of trucks.

Plus, these are thieves we are talking about. Pointing a gun at a human driver and telling them to pull over so they can rob the truck is something that could easily happen today but is extremely rare. The minimum police response time is something that's hard to measure. It might be many minutes 90% of the time, but if you do 10 or 20 of these heists eventually you're going to get unlucky and the cop will happen to be sitting at a speed trap right there are you're busting into the truck.

This is the fundamental problem with crime. You will get away with it most of the time, but when you don't you're fucked. It's a lousy career choice because the upsides are modest relatively speaking, and the downsides are huge. If you're going to be a criminal the trick is to steal enough to retire on and then immediately retire. Knocking over one random truck is not going to do it.

Re: Bogle Sounds a Warning on Index Funds

#140

Post by bluGill » Fri, Nov 30, 2018, 7:34 PM UTC

snowwrestler wrote: post #115

cs702 wrote: post #7

If the stock market becomes dominated by copycats copying each other , can it price equity risk accurately?

The real question is, what is the minimum number of active investors required for accurate pricing of risk in a market dominated by index funds? I'm not aware of an answer that is widely accepted as clearly right. In theory it might only be one! If there's only one active investor, and they find stocks that the index funds have not priced correctly, then the active investor can pounce, make some money, and move the s…

There are more stocks than an active investor can research the fair value of. If we are talking about a single stock, one active investor with enough money can force the "correct" price.