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

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

#311

Post by freetime2 »

segmondy wrote: post #177
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…

I'm 95% passive, but I think a place where active strategy was observed was with TSLA. actives knew it was on it's way to the index and piled on into it, once it got into index, it got bid up some more and then actives cashed out. passives didn't enjoy the ride up, but suffered the cost of the ride down.

> passives didn't enjoy the ride up

Passive investors who only invest in the S&P 500 didn't enjoy the ride up. But there are plenty of other indexes that people invest in passively that would have held TSLA prior to being added to the S&P 500.

I own SCHB, for example, which tracks the Dow Jones U.S. Broad Stock Market index, and would have owned shares in TSLA long before it was added to the S&P 500.

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

#312

Post by ericjang »

pedrocr wrote: post #163
ericjang wrote: post #15

Earlier quoted context omitted.

"statistically proven reality" is an oxymoron - past outperformance of passive funds (statistics) are no guarantee of future returns (reality). Some of the math surrounding the derivation of the weakest forms of EMT also relies on the assumption that everyone has access to the same information, which is patently false in the world we live in. Even retail traders sometimes have an information edge (e.g. working at a b…

The derivation that in total the passives outperform the actives is not a statistical result from historical data and doesn't require efficient market assumptions at all. It's just basic arithmetic that holds over any time period that the passives as a group will have the same returns as the actives as a group but spend less on fees. Sharpe's webpage on that gives a simple rundown of the calculations: https://web.sta…

> From this, it follows (as the night from the day) that the return on the average actively managed dollar must equal the market return. Why? Because the market return must equal a weighted average of the returns on the passive and active segments of the market. If the first two returns are the same, the third must be also.

Let me try to poke some holes in the argument.

1. Market return (M) is a weighted combination of passive (P) and actively managed portfolio (A) returns:

M = (1-w)P+(w)A.

2. Passive investor achieves market return M by holding the whole market, so P = M.

3. To satisfy the equation, A must also be M, regardless of w.

The logical error is in the assumption that P = M. To make this a concrete programming problem: let's say at time t=1, immediately prior to the start of a trading period, a passive investor decides to construct a portfolio. The passive investor makes investment allocations based on the current set of market prices.

Subsequently, how can the passive investor possibly match market returns without w being 0, or the passive investor knowing exactly how the active investors will allocate their holdings? That information lies in the future - one only needs to go though the exercise of simulating market returns on a discrete time basis to realize that the passive investor cannot possibly allocate to achieve exactly market returns.

M[1] = (1-w[1])P[1]+w[1]A[1]

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

#313

Post by Thorrez »

vomjom wrote: post #239
Thorrez wrote: post #232

Earlier quoted context omitted.

>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've always found stock buybacks intriguing and confusing. Here's a hypothetical scenario that seems to go against what you're saying: Company A buys back $1 work of stock.…

market cap = book value + discounted future cash flows = share price * number of outstanding shares When you do a buyback, the book value drops (company loses cash), but the discounted future cash flows remains unchanged. The number of outstanding shares also drops. The net result is the stock price increases as a company accumulates cash and uses it for buybacks because the number of outstanding shares drops. Anothe…

I don't understand your reasoning for why the price increases. To use your equation with my original example:

Initially:

market cap = $100

book value = $20

discounted future cash flows = $80

share price = $1

number of outstanding shares = 100

After the buyback:

market cap = $99

book value = $19

discounted future cash flows = $80

share price = $1

number of outstanding shares = 99

So the market cap didn't change.

I agree it's effectively the same as dividends (although I think buybacks are slightly better for the taxes of stockholders).

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

#314

Post by [deleted] »

Rury wrote: post #298
fighterpilot wrote: post #248

Earlier quoted context omitted.

> Changes in institutional ownership may signify what you are arguing. Agreed, but we don't have access to this, so we need to use what's available. The level of institutional ownership (10%) is useful because it provides approximate/rough bounds on its changes over the last 12 months. Take the limit to see why it's useful: If IO% is currently 0% (100%), we can conclude with some confidence that a protracted move fro…

>Agreed, but we don't have access to this We do have access to some info on this. https://www.nasdaq.com/market-activity/stocks/nndm/instituti... Institutional ownership increased by 21.7M shares in 2020, a roughly 8.27% increase in total shares held. Meaning the current institutional ownership almost all came from last year, and ARK lead that by a wide margin.

[deleted]

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

#315

Post by baq »

LatteLazy wrote: post #303
baq wrote: post #296

Earlier quoted context omitted.

They almost did. Market owners decided they won’t have it that way, as they should or there would be many more losers.

The market owners weren't involved. The clearing company have been accused of "helping" hedge funds. But that's a conspiracy theory really...

The accusations don't make much sense in the context of helping hedge funds. They were preventing brokers and option market makers from default.

(Friendly reminder that the DTCC is basically owned by "Wall Street".)

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

#316

Post by fighterpilot »

Rury wrote: post #298
fighterpilot wrote: post #248

Earlier quoted context omitted.

> Changes in institutional ownership may signify what you are arguing. Agreed, but we don't have access to this, so we need to use what's available. The level of institutional ownership (10%) is useful because it provides approximate/rough bounds on its changes over the last 12 months. Take the limit to see why it's useful: If IO% is currently 0% (100%), we can conclude with some confidence that a protracted move fro…

>Agreed, but we don't have access to this We do have access to some info on this. https://www.nasdaq.com/market-activity/stocks/nndm/instituti... Institutional ownership increased by 21.7M shares in 2020, a roughly 8.27% increase in total shares held. Meaning the current institutional ownership almost all came from last year, and ARK lead that by a wide margin.

True.

But since this is a pretty small amount relative to total outstanding it implies that most buying has been retail.

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

#317

Post by pedrocr »

ericjang wrote: post #312
pedrocr wrote: post #163

Earlier quoted context omitted.

The derivation that in total the passives outperform the actives is not a statistical result from historical data and doesn't require efficient market assumptions at all. It's just basic arithmetic that holds over any time period that the passives as a group will have the same returns as the actives as a group but spend less on fees. Sharpe's webpage on that gives a simple rundown of the calculations: https://web.sta…

> From this, it follows (as the night from the day) that the return on the average actively managed dollar must equal the market return. Why? Because the market return must equal a weighted average of the returns on the passive and active segments of the market. If the first two returns are the same, the third must be also. Let me try to poke some holes in the argument. 1. Market return (M) is a weighted combination…

> Subsequently, how can the passive investor possibly match market returns without w being 0, or the passive investor knowing exactly how the active investors will allocate their holdings? That information lies in the future - one only needs to go though the exercise of simulating market returns on a discrete time basis to realize that the passive investor cannot possibly allocate to achieve exactly market returns.

Because all he has to do is do absolutely nothing and he achieves that. The passive investor doesn't make choices, he buys a portfolio that has all the components of the index in the proportions at that point. Then the active traders trade among themselves and the prices move. And now the passive investor still holds all the components in the index at the proportions at t=2 because he hasn't traded, only the assets have changed value. You can observe this in practice. Index funds track their index incredibly well.

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

#318

Post by MR4D »

ItsMonkk wrote: post #149
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 avera…

If you consider #3 and don’t limit it to only debt-driven buybacks, then the price increase can be absolutely insane.

The best example is Berkshire Hathaway stock (BRK A share) which currently trades at $402,620 per share.

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

#319

Post by MR4D »

freetime2 wrote: post #309
Thorrez wrote: post #236

Earlier quoted context omitted.

>If you aren't bothered to do it manually then it can't be a big benefit for you... Wealthfront has economies of scale to write a program to perform tax loss harvesting automatically. Just because it's not worthwhile for me to do it manually myself doesn't make it not worthwhile for a program to do it automatically. Wealthfront does daily tax loss harvesting on individual stocks. That would be a tremendous amount of…

> Wealthfront does daily tax loss harvesting on individual stocks Does WealthFront do anything at the individual stock level? My understanding from looking at their landing page [1] is that they basically just allocate your money across a number of publicly traded ETFs: > How do you choose my investments? > We choose exchange-traded funds (ETFs) that track an index, such as the S&P 500 or emerging markets. Wealthfron…

In order to avoid wash-sale rules, you’d want them to be similar, but slightly different; such as VOO and VTI.

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

#320

Post by fnord77 »

WalterBright wrote: post #253
fnord77 wrote: post #212

Earlier quoted context omitted.

unless you're trading in an IRA

Of course (though the spread will still hurt). But there's a limit on how much you can contribute to an IRA. A serious investor will find the IRA contribution limits make it inconsequential. You also wouldn't want to fund the IRA with money you'll need before 65.

you can have millions in an IRA if you had rolled over past 401ks etc.
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