“Buy and Hold” No More: The Resurgence of Active Trading • Hacker News Board

Re: “Buy and Hold” No More: The Resurgence of Active Trading

#141

Post by cortesoft » Sat, Apr 10, 2021, 11:02 PM UTC

baq wrote: post #38

lupire wrote: post #3

Article misses the point (perhaps due to their capital investments) that the resurgence in active trading is almost entirely just gambling, but exempted from casino regulation. Also, saying "no more" to refer to a blip fad is a ridiculous healdit.

except it isn't: if enough gamblers stick to one ticker, they can break the market. options aren't roulette and stocks aren't blackjack. casinos don't have this failure mode. gamestop was the example of what happens in the limit - only the DTCC prevented a global financial crisis as a circuit breaker of last resort.

Casinos absolutely have that failure mode (which is why there are table limits)

Casinos need to ensure that they have enough liquidity to withstand a large bet hitting. The law of large numbers only works if you can survive the short term swings.

Re: “Buy and Hold” No More: The Resurgence of Active Trading

#142

Post by dan-robertson » Sat, Apr 10, 2021, 11:04 PM UTC

pedrocr wrote: post #138

xyzelement wrote: post #60

I am a hedge fund guy who invests his own $$$$ passively so make of this what you will. There will always be a mix of active and passive. Fundamentally - passive only works when it follows smart active. Actives do expensive research and trade against each other to arrive at the consensus price. Passives trade at that price for "free." Since both get the same price on average but passives incur no cost, they win on av…

Your active strategies are not against passive traders, they're against other active traders. You can't create one of those differential bets trading only with index funds as they won't take the other side of the unbalanced position you want as they're obliged to follow the index. In your scenarios you'd be winning against some other active investor taking the other side of the bet. Active as a whole can only beat pa…

In the scenario of a company that is obviously not a going concern you can sell stock short to passive investors. The company will then fail and it’s stock will be worth 0. You get to keep the money. I guess the worry would be that the company could raise money by selling shares and use that to avoid becoming insolvent, but at some point a company is going insolvent faster than it can issue new stock.

Re: “Buy and Hold” No More: The Resurgence of Active Trading

#143

Post by pedrocr » Sat, Apr 10, 2021, 11:04 PM UTC

xyzelement wrote: post #96

kreeben wrote: post #87

Earlier quoted context omitted.

>> think of the recent GME short squeeze but in reverse Reverse how? There are so many axis I don't know which to use as the basis of my flip. If you care to, please explain a bit more in detail.

Flip it on all axis, I guess :) But, sure. Let's say I know that you (index fun) are obligated to buy stock X tomorrow and over all foreseeable future. I am gonna hoard those shares at no risk and sell them to you at a VERY VERY painful price, since you have no room to say "that's too expensive, no thanks"

How are you going to hoard "at no risk"? You're trying to corner the market for a given stock in an index pushing it's price way up and thus exposing yourself to the price crashing down and wiping you out. Meanwhile the passives are routinely buying and selling index funds depending on their need to save or raise cash so the net inflows into that stock are positive or negative depending on that. And that stock is only a small part of the total portfolio. Depending on how their specific timing works out your scheme is a net positive or negative but it never wipes them out. Your risk is way worse, particularly if you need to leverage to buy the whole position. Even if your play was to corner the market completely and own almost the full company the end result would be it being removed from the index for there not being enough float around. Then all the index funds dump what they had of it, and you lose your shirt.

Re: “Buy and Hold” No More: The Resurgence of Active Trading

#144

Post by Spooky23 » Sat, Apr 10, 2021, 11:06 PM UTC

dasil003 wrote: post #70

chronic2021 wrote: post #58

Earlier quoted context omitted.

Citadel hedge fund. 19% annual return. After fees. For 30 years [1]. The most popular index funds (VTI, VGT) only have a 20-year track record, with a paltry 9% and 13% annual return, respectively. [1] https://www.clearbrookglobal.com/citadel-millennium-d-e-shaw...

Huh? The first index fund was started 45 years ago, and indexes existed and are tracked far longer than that. Tell me what percentage of hedge funds beat the S&P over the last 50 years?

What percentage of hedge fund clientele exclusively invested in a single hedge fund 50 years ago? Many index fund evangelists focus on that assumption. It’s a strawman.

You can invest actively and intelligently. For example, my 401k offered an emerging markets fund (MGEMX) that isn’t the ideal fund from a cost structure perspective... but it performed really well for a few years. It wasn’t speculation or reckless behavior to have exposure to that sector. Portfolio rebalancing booked my gains when it was rising 30%, and I ended up doing well when 2008 killed that sector.

That doesn’t mean buy and hold doesn’t make sense either. If I was lucky and held on to an early fun money Bitcoin buy I’d be on an island right now!

Re: “Buy and Hold” No More: The Resurgence of Active Trading

#145

Post by cortesoft » Sat, Apr 10, 2021, 11:07 PM UTC

AnimalMuppet wrote: post #97

glofish wrote: post #64

Earlier quoted context omitted.

It makes no sense to say that active trading is zero sum but passive trading isn't. Either both are or none are. Holding an asset for N days does not magically flip it from category to the other.

Yes, but a bit of no. Yes, if the market is overall rising, then active trading should enjoy that overall rise just like buy and hold does. But then why active trade? Because you think you can do better than passive. That part - the "doing better" part - is zero sum. In fact it's negative sum, because of transaction costs.

This assumes that all money stays in the market. Some people selling shares to active traders are pulling money out of the market to use for other purposes. Are they ‘losing’ money because they don’t get the profits from a later rise in price? Maybe, but it isnt so cut and dry.

Re: “Buy and Hold” No More: The Resurgence of Active Trading

#146

Post by pedrocr » Sat, Apr 10, 2021, 11:08 PM UTC

dan-robertson wrote: post #142

pedrocr wrote: post #138

Earlier quoted context omitted.

Your active strategies are not against passive traders, they're against other active traders. You can't create one of those differential bets trading only with index funds as they won't take the other side of the unbalanced position you want as they're obliged to follow the index. In your scenarios you'd be winning against some other active investor taking the other side of the bet. Active as a whole can only beat pa…

In the scenario of a company that is obviously not a going concern you can sell stock short to passive investors. The company will then fail and it’s stock will be worth 0. You get to keep the money. I guess the worry would be that the company could raise money by selling shares and use that to avoid becoming insolvent, but at some point a company is going insolvent faster than it can issue new stock.

You can't sell stock short specifically to passive investors. You have to sell it into the market. And since you're trying to sell only that stock and passive investors are buying the whole market your actual net counterparty is a set of some other active traders that hold the mirror position to yours, not the passive traders. The passives will always get the average of the market in that scenario and your above average returns have to come from someone else's below average returns.

Re: “Buy and Hold” No More: The Resurgence of Active Trading

#147

Post by hogFeast » Sat, Apr 10, 2021, 11:08 PM UTC

xiphias2 wrote: post #53

Maybe a16z doesn't like it, but ,,buy and hold'' active investing works quite well. Passive investing means doing what your bank advisor suggests. People are starting to realize that those advisors may not make smarter decisions on where the world is going than the people themselves.

I don't understand how this view is still controversial.

I worked in fund management: I have never seen people who were so overpaid (myself included) for doing so little. Fund managers are a net negative cost to the economy, and they earn fees to do it. Most of them, particularly personal advisors, understand nothing about investing that most people couldn't learn themselves (the only exception are the big wealth management divisions at IBs, most personal advisors likely cost clients substantially). I actually worked in the personal space too, I remember billing clients regularly ~$20k for 20 minutes work...there is no world (even inc. our costs) in which our fees made sense.

I invest actively because I have literally spent 14 hours/day researching stocks for most of the past decade. For anyone else, buy an index fund. Your performance is still going to be good, there is no way that most people get a return on time researching stocks/mutual funds themselves.

VCs have a fetish for financial idiocy that I will never understand (perhaps that is required to be a VC, no idea).

Re: “Buy and Hold” No More: The Resurgence of Active Trading

#148

Post by xyzelement » Sat, Apr 10, 2021, 11:12 PM UTC

pedrocr wrote: post #138

xyzelement wrote: post #60

I am a hedge fund guy who invests his own $$$$ passively so make of this what you will. There will always be a mix of active and passive. Fundamentally - passive only works when it follows smart active. Actives do expensive research and trade against each other to arrive at the consensus price. Passives trade at that price for "free." Since both get the same price on average but passives incur no cost, they win on av…

Your active strategies are not against passive traders, they're against other active traders. You can't create one of those differential bets trading only with index funds as they won't take the other side of the unbalanced position you want as they're obliged to follow the index. In your scenarios you'd be winning against some other active investor taking the other side of the bet. Active as a whole can only beat pa…

I think your use of theory and terms is right but you aren't visualizing how it would work in the world where nearly everyone is passive.

Simplest example I cited already: it becomes obvious that company X will default in short order, but it's a member of an index and the market will "buy" it anyway: I can short it (by borrowing from the passives and selling it to them next time they buy the index) and never have to cover since it's bankrupt. That's a simple example of a single-player active skewering the passives.

You can try to figure out what this means in terms of tracking error but it's kinda irrelevant to my point.

Re: “Buy and Hold” No More: The Resurgence of Active Trading

#149

Post by ItsMonkk » Sat, Apr 10, 2021, 11:14 PM UTC

xyzelement wrote: post #60

I am a hedge fund guy who invests his own $$$$ passively so make of this what you will. There will always be a mix of active and passive. Fundamentally - passive only works when it follows smart active. Actives do expensive research and trade against each other to arrive at the consensus price. Passives trade at that price for "free." Since both get the same price on average but passives incur no cost, they win on av…

So I've been trying to work this out. Previously I understood the idea "The passives are simply the average of the actives". So even if you had 99% passive, so long as the actives were doing their homework the system would work, but as you said you need to watch for exploits.

But then I had the question: When the world has gone passive, who is left as an active investor?

1. Wallstreetbets users who do poorly on average, and they are small

2. Highly skilled Hedgefunds like Medallion who do great on average, but they are small

3. ... the company using debt to buyback its own shares

So the key behind this entire stock market is that its a beauty contest where you need to make guesses as to what everyone else will do. But as active investors shrink with the increase in passive, what we are allowing happen is that the companies who use debt to buyback their shares are whats driving the market. Every dollar they spend on their stock is then magnified 100x by the big passive funds, and both 1 & 2 have no agency other than to try to get swept up in the winds.

I have not yet done the intensive research to understand how large 3 can effect a stock, does anyone here have any idea if this will be a problem, and if we are already seeing signs that this is happening already?

Re: “Buy and Hold” No More: The Resurgence of Active Trading

#150

Post by xyzelement » Sat, Apr 10, 2021, 11:14 PM UTC

pedrocr wrote: post #146

dan-robertson wrote: post #142

Earlier quoted context omitted.

In the scenario of a company that is obviously not a going concern you can sell stock short to passive investors. The company will then fail and it’s stock will be worth 0. You get to keep the money. I guess the worry would be that the company could raise money by selling shares and use that to avoid becoming insolvent, but at some point a company is going insolvent faster than it can issue new stock.

You can't sell stock short specifically to passive investors. You have to sell it into the market. And since you're trying to sell only that stock and passive investors are buying the whole market your actual net counterparty is a set of some other active traders that hold the mirror position to yours, not the passive traders. The passives will always get the average of the market in that scenario and your above aver…

I just wrote to you the same thing the parent of your post did. You are missing the part of the scenario where "everyone" except the one player is passive. Both I and the poster broke down the mechanics step by step for you...