Critical view of index investing

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NostraHistoria
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Critical view of index investing

Post by NostraHistoria »

I was listening to Invested by Danielle Town today. She says near the end of the book that index investing is not ideal during bear markets. She is a value investor. What are your thoughts?

Bogle said in The Little Book of Common Sense Investing that an index fund should beat an active fund during a bad year.
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Re: Critical view of index investing

Post by arcticpineapplecorp. »

i would say this author (never heard of her before) hasn't read these 2000+ boglehead posts showing the opposite of her claims:

https://www.google.com/search?sitesearc ... ar+markets

after reading those past posts, what do you now think of Ms. Town?

anything is possible in the short term, but isn't it the long term that matters?? If so what do you think of the following:

Image

Hedge funds are the ultimate in being able to supposedly sidestep bear markets right? I mean that's what "hedging" is. So how do they do over the long term? See for yourself:

https://www.etf.com/sections/index-inve ... nce-update

The aggregate return of hedge funds only outperformed virtually riskless one-year Treasuries by less than 1%, and underperformed intermediate and long-term Treasuries over the 10 years ending 2018.
Last edited by arcticpineapplecorp. on Wed Jun 02, 2021 1:25 pm, edited 2 times in total.
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Re: Critical view of index investing

Post by Thesaints »

NostraHistoria wrote: Wed Jun 02, 2021 1:15 pm I was listening to Invested by Danielle Town today. She says near the end of the book that index investing is not ideal during bear markets. She is a value investor. What are your thoughts?

Bogle said in The Little Book of Common Sense Investing that an index fund should beat an active fund during a bad year.
It is abundantly clear that during bear markets not being invested at all beats indexing hands down. Being short is even better.
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Re: Critical view of index investing

Post by tibbitts »

Thesaints wrote: Wed Jun 02, 2021 1:19 pm
NostraHistoria wrote: Wed Jun 02, 2021 1:15 pm I was listening to Invested by Danielle Town today. She says near the end of the book that index investing is not ideal during bear markets. She is a value investor. What are your thoughts?

Bogle said in The Little Book of Common Sense Investing that an index fund should beat an active fund during a bad year.
It is abundantly clear that during bear markets not being invested at all beats indexing hands down. Being short is even better.
The problem being identifying the beginning and ending of a bear market, without the benefit of hindsight.
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Re: Critical view of index investing

Post by arcticpineapplecorp. »

arguably one of the best value investors and by definition, active manger, Warren Buffett did slightly better than the total market between Nov 2007-Mar 2009 (-45% for Berkshire Hathaway vs -54% for VTSAX):

Image

source:
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

so while Warren did better than the market at that time, you'd still be down half your investment. It's not like his active management, nor his value investing saved your bacon at that time, did it? (see my signature below)
Last edited by arcticpineapplecorp. on Wed Jun 02, 2021 1:35 pm, edited 2 times in total.
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Re: Critical view of index investing

Post by nisiprius »

As thesaints already said...: If only you knew when a bear market was coming, you wouldn't invest in stocks at all.

During arcticpineapplecorp's time period, you could have beaten both the index fund and Berkshire Hathaway easily by investing in a money market mutual fund (green line).

Source

Image

If you don't know when a bear market is coming, what good does it do you to know which kind of fund will do better in a bear market?
Last edited by nisiprius on Wed Jun 02, 2021 1:39 pm, edited 2 times in total.
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Re: Critical view of index investing

Post by NostraHistoria »

Town is a novice to me. If her father did not get famous over Rule #1, I would probably never hear of her.
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Re: Critical view of index investing

Post by nisiprius »

NostraHistoria wrote: Wed Jun 02, 2021 1:36 pm Town is a novice to me. If her father did not get famous over Rule #1, I would probably never hear of her.
????? If you think Town is a novice, why did you read her book?

And what do you mean about "famous over Rule #1?" The person famous for "Rule #1" is Warren Buffett, often quoted as having said
Rule No.1: Never lose money. Rule No.2: Never forget rule No.1
Or, more accurately:
The first rule of an investment is don't lose. And the second rule of an investment is don't forget the first rule, and that's all the rules there are.
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Re: Critical view of index investing

Post by NostraHistoria »

I was looking for good books. Investing with Rose on Youtube recommended it.

Rule #1 is a book by Phil Town.

https://www.danielletown.com/
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Re: Critical view of index investing

Post by arcticpineapplecorp. »

nisiprius wrote: Wed Jun 02, 2021 1:41 pm
NostraHistoria wrote: Wed Jun 02, 2021 1:36 pm Town is a novice to me. If her father did not get famous over Rule #1, I would probably never hear of her.
????? If you think Town is a novice, why did you read her book?

And what do you mean about "famous over Rule #1?" The person famous for "Rule #1" is Warren Buffett:
Rule No.1: Never lose money. Rule No.2: Never forget rule No.1
Or, more accurately:
The first rule of an investment is don't lose. And the second rule of an investment is don't forget the first rule, and that's all the rules there are.
looks she's trying to be a guru. here's the article from 2019 introducing her to the world (via cnbc. they always need a guru, right?):
https://www.cnbc.com/2019/08/30/how-rel ... sting.html

her dad is (according to cnbc again, take that for what it's worth):
noted investor and author Phil Town.
duly noted.

never heard of him.

his "rule one investing" is the same as Warren's "first rule". So he's basically a copycat I guess.

https://www.ruleoneinvesting.com/

go to Phil's webpage and you can see how he makes his money....sold out conferences teaching people how to invest (supposedly).

Phil has classes, books, podcasts, so on.

Danielle sells classes too and obviously has book too:

https://learn.danielletown.com/
Last edited by arcticpineapplecorp. on Wed Jun 02, 2021 1:51 pm, edited 2 times in total.
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Re: Critical view of index investing

Post by Thesaints »

Methinks Buffett's Rule #1 refers to active investments where "active" does not mean picking and choosing amongst passive investments, but being active for real.
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Re: Critical view of index investing

Post by sureshoe »

Optimizing investments is trivial once someone tells you the direction the market is heading.
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Re: Critical view of index investing

Post by NostraHistoria »

I accidentally clicked the link to the book recommendations on this site. I will try those in the future.
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Re: Critical view of index investing

Post by Dave55 »

NostraHistoria wrote: Wed Jun 02, 2021 1:36 pm Town is a novice to me. If her father did not get famous over Rule #1, I would probably never hear of her.
Phil Town (her father) is a promotor.

Dave
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Re: Critical view of index investing

Post by MathWizard »

If you are a long-term investor, value investing beats index investing by a large margin,
IF you are better at valuing a select group of companies better than anyone else.
That is how Buffet and Munger made their fortunes.

However, if you want to go toe to toe with the people who are great at valuing specific
companies, and if you can keep emotions out of your investing, like the Buffets of the world,
you need to be very good.
I am humble enough to know that I am not.

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Re: Critical view of index investing

Post by firebirdparts »

Never heard of either of them.
This time is the same
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Re: Critical view of index investing

Post by alex_686 »

NostraHistoria wrote: Wed Jun 02, 2021 1:15 pm I was listening to Invested by Danielle Town today. She says near the end of the book that index investing is not ideal during bear markets. She is a value investor. What are your thoughts?
So 2 questions. What is the logic behind the statement - because I don't know Town. And how do we know that we are in a bear market? I mean, I can tell you yesterday that we are in a bear market, but not tomorrow.

But I am going to make a guess on what the theory is. Growth tends to be frothy stock with high valuations based on continued high growth. Value companies have lots of assets so they tend to putter forward even during a depression.

First, I don't think that theory is true anymore. There has been a radical change in how balance sheets look over the past 40 years. It used to be the majority of investments were towards physical plant. Now it is towards intangible property. So I don't think that logic will hold in the next recession.

Second, it requires you to time to market. You would need to shift to value before the market crashed, and then rebalance back to a neutral value/growth at the bottom. I am a modest proponent of active management. This is a valid course of action. It is also very very hard. Do you have any particular skill in this area? If not, I would suggest index investing. I mean, I have some training in this area and I might be able to do it, but I stick with index investing.
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Re: Critical view of index investing

Post by NostraHistoria »

I like index investing, too.
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Re: Critical view of index investing

Post by Yarlonkol12 »

I wouldn’t feel comfortable with an investment strategy that everyone in the world agreed was “the best” and found no flaws in the approach.
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Re: Critical view of index investing

Post by hnd »

back in like 2008-2009, our boss got tickets for a zig ziglar event. motivational stuff, and one of the speakers peddling their crap was Phil Town and his stock buying strategy. I forget most of it, except he had a sure fire way to make money in the stock market. it was like 3 things and if all 3 things were true, buy.

one of the guys was all in. subscribed and i'm not sure if he made money or not.

His podcast he cohosts with her was a suggested podcast and so i gave it a few listens. Hard pass on any books either one of them write.
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Re: Critical view of index investing

Post by NostraHistoria »

There is value to learning about their value investing approach.
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Re: Critical view of index investing

Post by venkman »

Every investor combined within a given universe of stocks will earn the market average, before accounting for trading costs and fees. An index investor will earn exactly the market average, minus very low costs. The average active investor will also earn exactly the market average (some will earn more, some less, but in the aggregate they will earn the market average), minus higher costs and fees. It doesn't matter whether the market average is positive or negative; the average active investor will underperform the average passive investor by the difference in costs and fees.
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Re: Critical view of index investing

Post by Northern Flicker »

Value overperformed the market in 2000-2002 but underperformed in 2007-2009:

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

I guess I won't be reading Danielle Town's book.
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Re: Critical view of index investing

Post by ckangas »

alex_686 wrote: Wed Jun 02, 2021 2:04 pm
NostraHistoria wrote: Wed Jun 02, 2021 1:15 pm I was listening to Invested by Danielle Town today. She says near the end of the book that index investing is not ideal during bear markets. She is a value investor. What are your thoughts?
So 2 questions. What is the logic behind the statement - because I don't know Town. And how do we know that we are in a bear market? I mean, I can tell you yesterday that we are in a bear market, but not tomorrow.

But I am going to make a guess on what the theory is. Growth tends to be frothy stock with high valuations based on continued high growth. Value companies have lots of assets so they tend to putter forward even during a depression.

First, I don't think that theory is true anymore. There has been a radical change in how balance sheets look over the past 40 years. It used to be the majority of investments were towards physical plant. Now it is towards intangible property. So I don't think that logic will hold in the next recession.

Second, it requires you to time to market. You would need to shift to value before the market crashed, and then rebalance back to a neutral value/growth at the bottom. I am a modest proponent of active management. This is a valid course of action. It is also very very hard. Do you have any particular skill in this area? If not, I would suggest index investing. I mean, I have some training in this area and I might be able to do it, but I stick with index investing.
I don't know Town either.

But the logic goes that passive funds neatly adhere to style lines, while active does not.
This "meddling" results in poorer performance during market expansions. But strangely enough seems to have a benefit during market downturns. People naturally seem biased towards safe assets during downturns, so perhaps that's what is at play.

Note that this is not suggesting that active outperforms passive overall. Merely that while active is an inferior approach in the aggregate, it comparatively does better during downturns than expansions.
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Re: Critical view of index investing

Post by BJJ_GUY »

alex_686 wrote: Wed Jun 02, 2021 2:04 pm
NostraHistoria wrote: Wed Jun 02, 2021 1:15 pm I was listening to Invested by Danielle Town today. She says near the end of the book that index investing is not ideal during bear markets. She is a value investor. What are your thoughts?
So 2 questions. What is the logic behind the statement - because I don't know Town. And how do we know that we are in a bear market? I mean, I can tell you yesterday that we are in a bear market, but not tomorrow.

But I am going to make a guess on what the theory is. Growth tends to be frothy stock with high valuations based on continued high growth. Value companies have lots of assets so they tend to putter forward even during a depression.

First, I don't think that theory is true anymore. There has been a radical change in how balance sheets look over the past 40 years. It used to be the majority of investments were towards physical plant. Now it is towards intangible property. So I don't think that logic will hold in the next recession.

Second, it requires you to time to market. You would need to shift to value before the market crashed, and then rebalance back to a neutral value/growth at the bottom. I am a modest proponent of active management. This is a valid course of action. It is also very very hard. Do you have any particular skill in this area? If not, I would suggest index investing. I mean, I have some training in this area and I might be able to do it, but I stick with index investing.
I've also never heard of Town, but that doesn't mean I don't find her statement sound. To make the claim that index investing isn't ideal in a recession/bear market says nothing about timing. The statement, in a vacuum, has sound logic.

I agree with you about some of the points supporting the assumption that index funds are inferior heading into (or during) a bear market. That being, growth stocks have really stretched valuations, with the gap in valuation between growth and value growing over the last decade. I think it's also important to point out that as a result of outperformance in growth stocks (and particularly the FAANGS at the top) has resulted in those same more highly priced stocks also representing a larger portion of the index. The frothy prices combined with the % exposure from the index is the trouble.

I'm not sure I follow your point about radical change in balance sheets and how this will impact stock prices during a recession. I understand the point about asset-light companies, and how this can have implications that might look different from history. The thing that still matters is how much are you paying, and what are you buying at that price? Even if it's fully accepted that asset light companies are different and should merit a higher valuation than historical norms for growth companies, that doesn't mean they can't become extremely overpriced. Alternatively, a 'value' company generating profits today can be a good investment despite relatively little to be excited about (relative to some tech sector with high growth aspirations). Importantly, a lot of recent years performance from tech companies was multiple expansion, not from substantial earnings growth.

1999, though different, had a really similar dynamic. 'Things were different' and the valuations were warranted. Then, when speculative behavior pulled back and fundamentals were considered, value indices went on to beat growth for double digits for nearly the next decade.

I'm not a value proponent or anything, but when valuations are at the levels they are now, it seems pretty obvious that the growth dominated index will suffer the pain when high valuations reverse course, which they inevitably will (though, sure, you can argue the relative degree, but we are far from that point right now).
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Re: Critical view of index investing

Post by whereskyle »

NostraHistoria wrote: Wed Jun 02, 2021 1:15 pm I was listening to Invested by Danielle Town today. She says near the end of the book that index investing is not ideal during bear markets. She is a value investor. What are your thoughts?

Bogle said in The Little Book of Common Sense Investing that an index fund should beat an active fund during a bad year.
Town's silly notion is based on the unproven, and certainly belied by the evidence, notion that active managers actually have the ability to time the market.

Also, value is far from synonymous with outperformance in a bear market. Berkshire lost 21% in the covid crash, whereas Amazon lost just 12%. Nobody knows nothing. Don't listen to people who think they do.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
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Re: Critical view of index investing

Post by BJJ_GUY »

whereskyle wrote: Thu Jun 03, 2021 5:53 am
NostraHistoria wrote: Wed Jun 02, 2021 1:15 pm I was listening to Invested by Danielle Town today. She says near the end of the book that index investing is not ideal during bear markets. She is a value investor. What are your thoughts?

Bogle said in The Little Book of Common Sense Investing that an index fund should beat an active fund during a bad year.
Town's silly notion is based on the unproven, and certainly belied by the evidence, notion that active managers actually have the ability to time the market.

Also, value is far from synonymous with outperformance in a bear market. Berkshire lost 21% in the covid crash, whereas Amazon lost just 12%. Nobody knows nothing. Don't listen to people who think they do.
Didn't Bogle actually reduce his equity allocation in 1999 (or maybe it was 2007) specifically because equity valuations had become so elevated?

I'm assuming your quote 'nobody knows nothing' is real? How do his actions square with that quote, or the wide belief in this forum that valuations aren't that important? (Honest question, I'm not familiar with his work, and genuinely don't understand what I see as a disconnect.)
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Re: Critical view of index investing

Post by whereskyle »

BJJ_GUY wrote: Thu Jun 03, 2021 6:11 am
whereskyle wrote: Thu Jun 03, 2021 5:53 am
NostraHistoria wrote: Wed Jun 02, 2021 1:15 pm I was listening to Invested by Danielle Town today. She says near the end of the book that index investing is not ideal during bear markets. She is a value investor. What are your thoughts?

Bogle said in The Little Book of Common Sense Investing that an index fund should beat an active fund during a bad year.
Town's silly notion is based on the unproven, and certainly belied by the evidence, notion that active managers actually have the ability to time the market.

Also, value is far from synonymous with outperformance in a bear market. Berkshire lost 21% in the covid crash, whereas Amazon lost just 12%. Nobody knows nothing. Don't listen to people who think they do.
Didn't Bogle actually reduce his equity allocation in 1999 (or maybe it was 2007) specifically because equity valuations had become so elevated?

I'm assuming your quote 'nobody knows nothing' is real? How do his actions square with that quote, or the wide belief in this forum that valuations aren't that important? (Honest question, I'm not familiar with his work, and genuinely don't understand what I see as a disconnect.)
I believe he stated that he reduced his equity allocation in 1999.

A couple of important things about this "infamous" decision on Jack's part. (From what I understand, others may correct me.)

1. This was not a reduce equity allocation until the storm passes and then increase it again move. Jack went from I believe a 60% equity allocation to a 50% equity allocation and then kept it there for the rest of his life.

2. Jack was 70 years old and had already won the game so to speak.

3. The US market had returned more than 17% annualized for the previous 17 years: https://www.portfoliovisualizer.com/bac ... ion1_1=100

Nothing about this move tells me that I as a 30-something accumulator should try to time the market based on equity valuations. It does tell me that when I'm at or near retirement and I've just made millions in a protracted bull market it might make sense to take some risk off the table. This of course squares perfectly with every version of lifecycle investing promoted by Jack and others that I have encountered.

Market timing has many meanings but the most nefarious in Jack's view, I believe, is trying to pull the risk off and risk on levels to exit the market and then re-enter it, which requires at least two correct timing calls. Simply taking risk off because you have enough and are feeling fearful is not that.

I have also wondered if Jack's move means that I shouldn't trust his advice not to time the market. After thinking about it for a while, I've decided the move is entirely blameless and actually another good example for investors in Jack's lifetime of good examples. If you're 70 and wealthy and worried about high equity valuations and comfortable with a lower equity allocation for the rest of your life, go ahead and take some risk off the table.
Last edited by whereskyle on Thu Jun 03, 2021 8:11 am, edited 1 time in total.
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Re: Critical view of index investing

Post by Aged Maduro »

Index investing has worked well for the last forty years because we have been blessed with an unprecendented time of peace and prosperity...Pax Americana if you will. Simply buying into the broad market was good enough. We are now at the end of a long term debt cycle with rising domestic and international tensions. When a large scale crisis and resulting rotations occur it will probably be better to have active management that is limber enough to move your assets in and out of the right markets. Index funds will not have that ability and may suffer as a result. The very fact that the advantages of passive index fund investing have now become conventional wisdom should tell us that its time is coming to an end.
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Re: Critical view of index investing

Post by whereskyle »

Aged Maduro wrote: Thu Jun 03, 2021 8:09 am Index investing has worked well for the last forty years because we have been blessed with an unprecendented time of peace and prosperity...Pax Americana if you will. Simply buying into the broad market was good enough. We are now at the end of a long term debt cycle with rising domestic and international tensions. When a large scale crisis and resulting rotations occur it will probably be better to have active management that is limber enough to move your assets in and out of the right markets. Index funds will not have that ability and may suffer as a result. The very fact that the advantages of passive index fund investing have now become conventional wisdom should tell us that its time is coming to an end.
Wow I really wonder what the criteria for selecting managers who are limber enough to move assets in and out of the right markets are
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Re: Critical view of index investing

Post by OohLaLa »

Not another guru/ Suze Orman. :annoyed So many people put their trust in these people. It's demoralizing.
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Re: Critical view of index investing

Post by retiringwhen »

NostraHistoria wrote: Wed Jun 02, 2021 1:56 pm I accidentally clicked the link to the book recommendations on this site. I will try those in the future.
Did you click on the link to the Danielle Town book on a Bogleheads site or somewhere else? I would be very surprised if this book was even linked anywhere in the Wiki's but I guess it could be discussed in another forum topic.
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Re: Critical view of index investing

Post by alex_686 »

BJJ_GUY wrote: Thu Jun 03, 2021 2:14 am I'm not sure I follow your point about radical change in balance sheets and how this will impact stock prices during a recession. I understand the point about asset-light companies, and how this can have implications that might look different from history. The thing that still matters is how much are you paying, and what are you buying at that price? Even if it's fully accepted that asset light companies are different and should merit a higher valuation than historical norms for growth companies, that doesn't mean they can't become extremely overpriced. Alternatively, a 'value' company generating profits today can be a good investment despite relatively little to be excited about (relative to some tech sector with high growth aspirations). Importantly, a lot of recent years performance from tech companies was multiple expansion, not from substantial earnings growth.
First, most Value Factors use book price in addition to the P/E ratio. Book value looks very differently then it did 40 years ago.

Second, I am arguing that asset light companies are different from the past, not that they merit higher valuations.

So, here is my point. During a stock market crash, why would growth companies PE ratios contract more than value companies?

To extend, there are a reason why value companies are cheap. Maybe they are slow and steady turtles. Maybe they are over leveraged companies in a dying sector. Value companies are far more likely to go bankruptcy than growth companies.

Prior to 2000 I could lay out a solid argument why. Book value made up the majority of a company's value, so book value tends to anchor the stock price, making it less volatile. That is not true today.

I will even extend this argument. I kind of think the Value factor is dead, or dying out. With companies now investing more into intangibles the price-to-book value contains less predictive information. The one exception is banks, where the majority of their assets are loans and those are marked-to-market. It is still predictive here.
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Re: Critical view of index investing

Post by BJJ_GUY »

alex_686 wrote: Thu Jun 03, 2021 10:17 am
BJJ_GUY wrote: Thu Jun 03, 2021 2:14 am I'm not sure I follow your point about radical change in balance sheets and how this will impact stock prices during a recession. I understand the point about asset-light companies, and how this can have implications that might look different from history. The thing that still matters is how much are you paying, and what are you buying at that price? Even if it's fully accepted that asset light companies are different and should merit a higher valuation than historical norms for growth companies, that doesn't mean they can't become extremely overpriced. Alternatively, a 'value' company generating profits today can be a good investment despite relatively little to be excited about (relative to some tech sector with high growth aspirations). Importantly, a lot of recent years performance from tech companies was multiple expansion, not from substantial earnings growth.
First, most Value Factors use book price in addition to the P/E ratio. Book value looks very differently then it did 40 years ago.

Second, I am arguing that asset light companies are different from the past, not that they merit higher valuations.

So, here is my point. During a stock market crash, why would growth companies PE ratios contract more than value companies?

To extend, there are a reason why value companies are cheap. Maybe they are slow and steady turtles. Maybe they are over leveraged companies in a dying sector. Value companies are far more likely to go bankruptcy than growth companies.

Prior to 2000 I could lay out a solid argument why. Book value made up the majority of a company's value, so book value tends to anchor the stock price, making it less volatile. That is not true today.

I will even extend this argument. I kind of think the Value factor is dead, or dying out. With companies now investing more into intangibles the price-to-book value contains less predictive information. The one exception is banks, where the majority of their assets are loans and those are marked-to-market. It is still predictive here.
I guess I mostly agree then.

I'd expect "growth" to underperform "value" either in a recession or a long period of valuation normalization because by pretty much every way to measure valuation the disparity between value and growth indices is almost or above the widest it's ever been. So to be clear, all else equal, I'm not saying value should outperform in a down market just because of their sector (or capital structure etc.). I'm saying it because growth is way more overpriced right now.

No argument from me on your P/B point... The flaws you point out with P/B, and instability of earnings, I prefer market cap-to-sales (adjusted for profit margins). That metric is more stable and consistently higher correlated with subsequent 12 yr returns than all the other metrics.
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Re: Critical view of index investing

Post by hi_there »

NostraHistoria wrote: Wed Jun 02, 2021 1:15 pm I was listening to Invested by Danielle Town today. She says near the end of the book that index investing is not ideal during bear markets. She is a value investor. What are your thoughts?

Bogle said in The Little Book of Common Sense Investing that an index fund should beat an active fund during a bad year.
It does not seem surprising that index investing would not perform well when the market is going down. Therefore, we should only buy stocks when the market will go up (?).
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Re: Critical view of index investing

Post by OohLaLa »

hi_there wrote: Thu Jun 03, 2021 1:07 pm
NostraHistoria wrote: Wed Jun 02, 2021 1:15 pm I was listening to Invested by Danielle Town today. She says near the end of the book that index investing is not ideal during bear markets. She is a value investor. What are your thoughts?

Bogle said in The Little Book of Common Sense Investing that an index fund should beat an active fund during a bad year.
It does not seem surprising that index investing would not perform well when the market is going down. Therefore, we should only buy stocks when the market will go up (?).
It's real simple, you see. You need to find depressed stocks of solid companies or ones undergoing a turnaround story, instead of diversifying with alllll those lame ducks! This is of course as easy as it sounds!

I know this, because I engaged in stock-picking and suffered massive opportunity cost instead of sticking to S&P500 and Nasdaq-100. :mrgreen:

EDIT: To be fair, my main sin was to be grossly over-concentrated on certain stocks. The point still remains: just because a company is an obvious pick to you doesn't mean the market will think the same, and this holds even if you stick to "fundamentals". Best thing is that the stocks seeing meteoric rises are the exact opposite: Gamestop, AMC, Hertz, Carnival Cruises in the middle of the pandemic, and I am sure I am missing plenty.
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Re: Critical view of index investing

Post by Northern Flicker »

BJJ_Guy wrote: I've also never heard of Town, but that doesn't mean I don't find her statement sound. To make the claim that index investing isn't ideal in a recession/bear market says nothing about timing. The statement, in a vacuum, has sound logic.
What logic is that? Investing in stocks has risk. One if those risks is a bear market.
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Re: Critical view of index investing

Post by BJJ_GUY »

Northern Flicker wrote: Thu Jun 03, 2021 2:14 pm
BJJ_Guy wrote: I've also never heard of Town, but that doesn't mean I don't find her statement sound. To make the claim that index investing isn't ideal in a recession/bear market says nothing about timing. The statement, in a vacuum, has sound logic.
What logic is that? Investing in stocks has risk. One if those risks is a bear market.
Well after more than a decade of one of the best runs for the stock market, the index weights shift toward the out-performers. The stocks at the top of the index, likely (not definitely), will be the ones most overvalued. The end of bull markets, or at periods when stretched valuations continue to defy gravity -- those last few years of positive performance tend to always be driven by multiple expansion rather than driven in relation to underlying fundamentals.

This is absolutely the case today where the stocks at the top of the market have grown as a % of the index, and are also some of the highest valuations.

So yeah, logic is sound to simply say that an index fund isn't the ideal investment is pretty inarguable. If she would have suggested what the ideal investment is, and how to time it, or something, then it would have been a dubious point. The statement on it's own is strong
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Re: Critical view of index investing

Post by Northern Flicker »

BJJ_GUY wrote: Thu Jun 03, 2021 2:26 pm
Northern Flicker wrote: Thu Jun 03, 2021 2:14 pm
BJJ_Guy wrote: I've also never heard of Town, but that doesn't mean I don't find her statement sound. To make the claim that index investing isn't ideal in a recession/bear market says nothing about timing. The statement, in a vacuum, has sound logic.
What logic is that? Investing in stocks has risk. One if those risks is a bear market.
Well after more than a decade of one of the best runs for the stock market, the index weights shift toward the out-performers. The stocks at the top of the index, likely (not definitely), will be the ones most overvalued. The end of bull markets, or at periods when stretched valuations continue to defy gravity -- those last few years of positive performance tend to always be driven by multiple expansion rather than driven in relation to underlying fundamentals.

This is absolutely the case today where the stocks at the top of the market have grown as a % of the index, and are also some of the highest valuations.

So yeah, logic is sound to simply say that an index fund isn't the ideal investment is pretty inarguable. If she would have suggested what the ideal investment is, and how to time it, or something, then it would have been a dubious point. The statement on it's own is strong
Not only is it arguable, but it is incorrect. There is no empirical evidence that investors can, in a statistically significant way, outperform the market by choosing a different portfolio from the market portfolio. Statistical significance means with greater success than what would be achieved by chance alone.

It is not even correct that the largest stocks in the market are necessarily the most overvalued at a bull market peak.
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Re: Critical view of index investing

Post by BJJ_GUY »

Northern Flicker wrote: Thu Jun 03, 2021 2:41 pm
BJJ_GUY wrote: Thu Jun 03, 2021 2:26 pm
Northern Flicker wrote: Thu Jun 03, 2021 2:14 pm
BJJ_Guy wrote: I've also never heard of Town, but that doesn't mean I don't find her statement sound. To make the claim that index investing isn't ideal in a recession/bear market says nothing about timing. The statement, in a vacuum, has sound logic.
What logic is that? Investing in stocks has risk. One if those risks is a bear market.
Well after more than a decade of one of the best runs for the stock market, the index weights shift toward the out-performers. The stocks at the top of the index, likely (not definitely), will be the ones most overvalued. The end of bull markets, or at periods when stretched valuations continue to defy gravity -- those last few years of positive performance tend to always be driven by multiple expansion rather than driven in relation to underlying fundamentals.

This is absolutely the case today where the stocks at the top of the market have grown as a % of the index, and are also some of the highest valuations.

So yeah, logic is sound to simply say that an index fund isn't the ideal investment is pretty inarguable. If she would have suggested what the ideal investment is, and how to time it, or something, then it would have been a dubious point. The statement on it's own is strong
Not only is it arguable, but it is incorrect. There is no empirical evidence that investors can, in a statistically significant way, outperform the market by choosing a different portfolio from the market portfolio. Statistical significance means with greater success than what would be achieved by chance alone.

It is not even correct that the largest stocks in the market are necessarily the most overvalued at a bull market peak.
Re-read what I said. I never said anything about choosing a different portfolio.
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Re: Critical view of index investing

Post by Gaston »

If Ms Town is simply saying that stock index funds don’t do well in bear markets, she is correct. But this is equivalent to saying that if you jump into water, you will get wet.

If Ms Town is saying, however, that passively managed index funds do worse in bear markets than their actively managed equivalents, that’s nonsense. Yes, actively managed funds tend to hold more cash, which helps in a bear market, but not enough to offset the higher expenses of actively managed funds.

Either way, neither she nor anyone else can predict the onset, depth or duration of a bear market, so the point of her statement eludes me.
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Re: Critical view of index investing

Post by Dennisl »

Why don't you look at the data and see how active funds have performed against index funds in downturns. Theoretically they can do better, but how do they usually perform in reality? Proof is in the pudding.
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Re: Critical view of index investing

Post by OohLaLa »

Gaston wrote: Thu Jun 03, 2021 3:55 pm [...]
Either way, neither she nor anyone else can predict the onset, depth or duration of a bear market, so the point of her statement eludes me.
Well, if your career is in being a personal finance + investment guru, you need clout. To get clout, you speak and write confidently, even if you don't and can't know the answer. Humility is for chumps.

You peddle your wares, broadcasting your message as often possible. All it takes is one good break. It doesn't matter if you keep getting things wrong. Noone is keeping you honest, nor keeping tabs.

I don't know Danielle Town's work in detail. It's just that everybody and their dog is a finance expert and, in the bad cases, it $#%!@ over the followers in one way or another.
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Re: Critical view of index investing

Post by Northern Flicker »

BJJ_GUY wrote: Thu Jun 03, 2021 3:16 pm
Northern Flicker wrote: Thu Jun 03, 2021 2:41 pm
BJJ_GUY wrote: Thu Jun 03, 2021 2:26 pm
Northern Flicker wrote: Thu Jun 03, 2021 2:14 pm
BJJ_Guy wrote: I've also never heard of Town, but that doesn't mean I don't find her statement sound. To make the claim that index investing isn't ideal in a recession/bear market says nothing about timing. The statement, in a vacuum, has sound logic.
What logic is that? Investing in stocks has risk. One if those risks is a bear market.
Well after more than a decade of one of the best runs for the stock market, the index weights shift toward the out-performers. The stocks at the top of the index, likely (not definitely), will be the ones most overvalued. The end of bull markets, or at periods when stretched valuations continue to defy gravity -- those last few years of positive performance tend to always be driven by multiple expansion rather than driven in relation to underlying fundamentals.

This is absolutely the case today where the stocks at the top of the market have grown as a % of the index, and are also some of the highest valuations.

So yeah, logic is sound to simply say that an index fund isn't the ideal investment is pretty inarguable. If she would have suggested what the ideal investment is, and how to time it, or something, then it would have been a dubious point. The statement on it's own is strong
Not only is it arguable, but it is incorrect. There is no empirical evidence that investors can, in a statistically significant way, outperform the market by choosing a different portfolio from the market portfolio. Statistical significance means with greater success than what would be achieved by chance alone.

It is not even correct that the largest stocks in the market are necessarily the most overvalued at a bull market peak.
Re-read what I said. I never said anything about choosing a different portfolio.
We can always look back at investment outcomes and see segments of the market that overperformed or underperformed. Saying that an index fund is not the ideal investment in a bear market is an a priori prediction, not an ex-post-facto analysis.
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Re: Critical view of index investing

Post by FrugalInvestor »

NostraHistoria wrote: Wed Jun 02, 2021 4:29 pm There is value to learning about their value investing approach.
There is always value in learning and often times the lesson is what not to do.
Have a plan, stay the course and simplify. Then ignore the noise!
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Re: Critical view of index investing

Post by manuvns »

Index invsting works if you buy low and sell high which is very hard to do , i generally prefer to trade options when markets are low or volatile better returns with lower risks .
Thanks!
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Re: Critical view of index investing

Post by BJJ_GUY »

Northern Flicker wrote: Thu Jun 03, 2021 4:43 pm
We can always look back at investment outcomes and see segments of the market that overperformed or underperformed. Saying that an index fund is not the ideal investment in a bear market is an a priori prediction, not an ex-post-facto analysis.
Only if the data is analyzed in context. The index construction looked entirely different in 2008, not to mention the the banks were at the epicenter of concern. We can learn from the past, but we can't interpret blindly.

Either way, this has gotten away from the point. The point I was trying to make is that overpriced stocks have more to lose since they've benefited on the way up from multiple expansion. Technical pressure from fund flows will impact the most liquid, and (in my opinion) likely the most overpriced stocks.

If you think the above paragraph contains logical statements, then you agree with me. If you don't think fundamentals, and technicals will impact returns in a recession/bear market, then we disagree. But this was the only point I was trying to make.
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Re: Critical view of index investing

Post by FrugalInvestor »

manuvns wrote: Thu Jun 03, 2021 4:51 pm Index invsting works if you buy low and sell high which is very hard to do , i generally prefer to trade options when markets are low or volatile better returns with lower risks .
If you look at a historical chart of stock market performance it appears pretty likely the you will buy low and sell high as long as you aren't jumping out of and into the market.
Last edited by FrugalInvestor on Thu Jun 03, 2021 10:04 pm, edited 1 time in total.
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Re: Critical view of index investing

Post by Northern Flicker »

manuvns wrote: Thu Jun 03, 2021 4:51 pm Index invsting works if you buy low and sell high which is very hard to do , i generally prefer to trade options when markets are low or volatile better returns with lower risks .
Index investing works if you buy and hold.
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Re: Critical view of index investing

Post by esteen »

BJJ_GUY wrote: Thu Jun 03, 2021 2:14 am I've also never heard of Town, but that doesn't mean I don't find her statement sound. To make the claim that index investing isn't ideal in a recession/bear market says nothing about timing. The statement, in a vacuum, has sound logic.
My problem with her statement is that it isn't actionable, and my guess is that she suggests it to be actionable in her book.

To become actionable, one would need to be able to time all the bear markets. Or prove that the outperformance in bears outstrips the underperformance in bulls. Which I don't think she did either.
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