Critical view of index investing

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Grt2bOutdoors
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Re: Critical view of index investing

Post by Grt2bOutdoors »

NostraHistoria wrote: Wed Jun 02, 2021 2:08 pm I like index investing, too.
So do countless millions of other people including entities such as pension funds, government and not for profits, endowments and foundation. To the tune of trillions of dollars in net asset value.
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Re: Critical view of index investing

Post by Northern Flicker »

BJJ_Guy wrote: 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.
This is backwards. We only know that a stock was overpriced ex-post-facto because it lost more than other stocks that ex-post-facto we thus deem to have been less overvalued.
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Re: Critical view of index investing

Post by whereskyle »

BJJ_GUY wrote: Thu Jun 03, 2021 5:02 pm
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.
"Overpriced growth" stocks Amazon and Netflix barely budged in the covid crash and bear market of 2020 whereas underpriced value stocks Berkshire and Disney lost significantly more.

https://www.portfoliovisualizer.com/bac ... ion3_3=100

Stop pretending you know things about how certain kinds of stocks will perform in different conditions unless you want to learn the hard way that you do not know such things.

Growth as a group kicked the pants off value in 2020 and experienced a significantly shallower drawdown.

https://www.portfoliovisualizer.com/bac ... ion2_2=100
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Re: Critical view of index investing

Post by vineviz »

Northern Flicker wrote: Thu Jun 03, 2021 2:41 pm 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.

This statement is categorically false if by "outperform" you mean "earn higher returns".

Getting a higher return than the market is easily accomplished by simply accepting more systematic risk in your portfolio. Investors who hold an 80/20 stock and bond portfolio instead of the market portfolio do this quite reliably, for instance.
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Re: Critical view of index investing

Post by Northern Flicker »

Correct. I intended to mean that when holding exposure to systematic risk factors constant, there is no evidence that investors can use stock selection to enhance return.
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Re: Critical view of index investing

Post by averagedude »

What really matters is how an investment performs throughout the entire market cycle.
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Re: Critical view of index investing

Post by Spinola »

As actively managed funds continue to underperform and lose market share to index funds I expect to read more articles like this.. :mrgreen:
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Re: Critical view of index investing

Post by acegolfer »

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.
This convinced me that it's better for most investors not to listen to these financial pundits. I have watched many Youtubers and the only Youtuber that makes any sense is Ben Felix.
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Re: Critical view of index investing

Post by NostraHistoria »

Some are good, and some are not good. I used to watch CNBC from about 2008 to 2012 or so. From what I remember, it seemed that the people on there are actively managing their portfolios. It is terrible for a Boglehead.
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Re: Critical view of index investing

Post by FrugalInvestor »

acegolfer wrote: Sat Jun 19, 2021 6:36 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.
This convinced me that it's better for most investors not to listen to these financial pundits. I have watched many Youtubers and the only Youtuber that makes any sense is Ben Felix.
My thought is that if you're a long-term investor it doesn't matter what happens today or tomorrow or even this year or next year, what matters is what happens with your investments over the long-term. I'm convinced that I stand the best chance of success by investing in low-cost index funds. Over the past few decades this approach has served me very well and there have always been various pundits preaching otherwise. I will continue utilizing this approach, as a matter of fact I've consolidated to just a couple of funds over the years.
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Re: Critical view of index investing

Post by mr_brightside »

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.
glad someone said it -- i have these same concerns. will be interesting to see what the next 20-30 years show.

in the meantime -- I am still a big proponent for indexing with the majority of my stock exposure -- if for no other reason the very low ERs. but i do have some 'active' MFs too.

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Re: Critical view of index investing

Post by LilyFleur »

MathWizard wrote: Wed Jun 02, 2021 2:02 pm 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.

If someone handed you a million dollars, would you rather play poker against the world's best,
or would you rather own a piece of the casino that the game is held in? I know my answer.
There are value index funds.
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Re: Critical view of index investing

Post by gougou »

I’m very skeptical of anyone saying that index investing is the holy grail of investing that beats 99% of active managed investing. I never heard of any billionaire who made their fortune from index investing. I don’t think rich people are all stupid to pay those fees to hedge funds/investment banks to manage their money.

Index investing is “average investing”. You buy all the companies, good or bad, overvalued or undervalued. If 90% of all the companies are bad/overvalued, you won’t get a good return buying them all. And we are probably in that situation today, so it may make sense to be very selective such as leaving out the trillion dollar companies or the bubble stocks like Tesla.

When the market is depressed and everything is cheap, that could be the right time to double down on the index.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
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Re: Critical view of index investing

Post by UpperNwGuy »

gougou wrote: Sun Jun 20, 2021 7:22 pm Index investing is “average investing”. You buy all the companies, good or bad, overvalued or undervalued.
Yes! That's me! I'm an average investor, and I'm proud of it. I want to be average. I don't want to beat the market, and I don't want to underperform the market either. I will keep investing in index funds while all the smart people try to beat the market.
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Re: Critical view of index investing

Post by gougou »

UpperNwGuy wrote: Sun Jun 20, 2021 7:28 pm
gougou wrote: Sun Jun 20, 2021 7:22 pm Index investing is “average investing”. You buy all the companies, good or bad, overvalued or undervalued.
Yes! That's me! I'm an average investor, and I'm proud of it. I want to be average. I don't want to beat the market, and I don't want to underperform the market either. I will keep investing in index funds while all the smart people try to beat the market.
That’s good for you, and you probably did well. I also made some good money from SP500 in the past. But recently I cashed out all my index funds and doubled down on investing for cashflow and undervalued stocks. I’ll happily take my 8%+ cashflow plus annual growth on my portfolio under some reasonable assumptions. I don’t care if I can beat the index or not.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
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Re: Critical view of index investing

Post by Aged Maduro »

gougou wrote: Sun Jun 20, 2021 7:22 pm I’m very skeptical of anyone saying that index investing is the holy grail of investing that beats 99% of active managed investing. I never heard of any billionaire who made their fortune from index investing. I don’t think rich people are all stupid to pay those fees to hedge funds/investment banks to manage their money.

Index investing is “average investing”. You buy all the companies, good or bad, overvalued or undervalued. If 90% of all the companies are bad/overvalued, you won’t get a good return buying them all. And we are probably in that situation today, so it may make sense to be very selective such as leaving out the trillion dollar companies or the bubble stocks like Tesla.

When the market is depressed and everything is cheap, that could be the right time to double down on the index.
With a few exceptions, billionaires do not make their money by investing in stocks. They make their fortunes by building incredibly successful businesses or developing high end commercial real estate. The returns on building a succesful business dwarf the returns of paper assets. After they sell said business they may park their wealth in stocks and bonds but that is not how the initial fortune is made.
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Re: Critical view of index investing

Post by Exchme »

gougou wrote: Sun Jun 20, 2021 7:22 pm I’m very skeptical of anyone saying that index investing is the holy grail of investing that beats 99% of active managed investing. I never heard of any billionaire who made their fortune from index investing. I don’t think rich people are all stupid to pay those fees to hedge funds/investment banks to manage their money.

Index investing is “average investing”. You buy all the companies, good or bad, overvalued or undervalued. If 90% of all the companies are bad/overvalued, you won’t get a good return buying them all. And we are probably in that situation today, so it may make sense to be very selective such as leaving out the trillion dollar companies or the bubble stocks like Tesla.

When the market is depressed and everything is cheap, that could be the right time to double down on the index.
gougou wrote: Sun Jun 20, 2021 7:40 pm That’s good for you, and you probably did well. I also made some good money from SP500 in the past. But recently I cashed out all my index funds and doubled down on investing for cashflow and undervalued stocks. I’ll happily take my 8%+ cashflow plus annual growth on my portfolio under some reasonable assumptions. I don’t care if I can beat the index or not.
How do you get from "rich people" and their army of advisors must be able to beat the market (there is no evidence for that, but let's follow you anyway), to therefore you are going to beat the market too even though you don't have any of those special advisors? Why aren't rich people with their special insight snapping up all the super high yield bargains you are buying?

Anything paying 8+% in this low interest rate environment must have serious risks attached to it. Maybe you get lucky and it works out, but that's the math of active management, the % of people that beat the market over time is indistinguishable from random chance.
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Re: Critical view of index investing

Post by Normchad »

gougou wrote: Sun Jun 20, 2021 7:22 pm I’m very skeptical of anyone saying that index investing is the holy grail of investing that beats 99% of active managed investing. I never heard of any billionaire who made their fortune from index investing. I don’t think rich people are all stupid to pay those fees to hedge funds/investment banks to manage their money.

Index investing is “average investing”. You buy all the companies, good or bad, overvalued or undervalued. If 90% of all the companies are bad/overvalued, you won’t get a good return buying them all. And we are probably in that situation today, so it may make sense to be very selective such as leaving out the trillion dollar companies or the bubble stocks like Tesla.

When the market is depressed and everything is cheap, that could be the right time to double down on the index.
You can back test the data. Passive index investing is far superior to active investing..... And in fact, due to behavioral errors, and people thinking they are smarter than they really are, simple S&P500 index investing performs much better than the average investor. Someplace, Fidelity mentioned that it's best performing accounts belonged to deceased people, or people who forgot they had accounts.....

The super wealthy didn't get that way by buying actively managed funds. And investing is great, because there is so much data we can actually look at. Index investors absolutely crush active investors over long time periods. It's a huge discrepancy.

But you say "the rich have hedge funds" that we can't see, and that we don't have access to. Well, Warren Buffet took on that challenge a while back. He challenge the hedge fund industry to a 10 year bet; and trounced them, by simply picking an S&P 500 index fund. It's interesting, because the hedge fund guys are "the smartest guys in the room"; and they can pick anything they want. Surely they can win, right? Nope. Cause nobody knows nothing.....
https://www.investopedia.com/articles/i ... a-brkb.asp
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Re: Critical view of index investing

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Re: Critical view of index investing

Post by MathWizard »

LilyFleur wrote: Sun Jun 20, 2021 4:27 pm
MathWizard wrote: Wed Jun 02, 2021 2:02 pm 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.

If someone handed you a million dollars, would you rather play poker against the world's best,
or would you rather own a piece of the casino that the game is held in? I know my answer.
There are value index funds.
Yes. I tried them for years,and they underperformed total market investing. I was disappointed.

My take was that someone needed to constantly evaluate and find the stocks that go into the value fund, and that between that someone not picking very well and the higher fees needed to pay for the analysis and analyst,caused the fund to underperform.

Also, if it was that easy,everyone would be investing in those funds, and they would lose their price advantage.
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Re: Critical view of index investing

Post by gougou »

Exchme wrote: Sun Jun 20, 2021 9:36 pm
gougou wrote: Sun Jun 20, 2021 7:22 pm I’m very skeptical of anyone saying that index investing is the holy grail of investing that beats 99% of active managed investing. I never heard of any billionaire who made their fortune from index investing. I don’t think rich people are all stupid to pay those fees to hedge funds/investment banks to manage their money.

Index investing is “average investing”. You buy all the companies, good or bad, overvalued or undervalued. If 90% of all the companies are bad/overvalued, you won’t get a good return buying them all. And we are probably in that situation today, so it may make sense to be very selective such as leaving out the trillion dollar companies or the bubble stocks like Tesla.

When the market is depressed and everything is cheap, that could be the right time to double down on the index.
gougou wrote: Sun Jun 20, 2021 7:40 pm That’s good for you, and you probably did well. I also made some good money from SP500 in the past. But recently I cashed out all my index funds and doubled down on investing for cashflow and undervalued stocks. I’ll happily take my 8%+ cashflow plus annual growth on my portfolio under some reasonable assumptions. I don’t care if I can beat the index or not.
How do you get from "rich people" and their army of advisors must be able to beat the market (there is no evidence for that, but let's follow you anyway), to therefore you are going to beat the market too even though you don't have any of those special advisors? Why aren't rich people with their special insight snapping up all the super high yield bargains you are buying?

Anything paying 8+% in this low interest rate environment must have serious risks attached to it. Maybe you get lucky and it works out, but that's the math of active management, the % of people that beat the market over time is indistinguishable from random chance.
There are many billionaires who got rich from investing in stocks (Buffett, Soros, Simons, Icahn etc) and none of them invested in index funds. They didn’t start with a whole lot of capital, so they must have beaten the market by a large margin. It looks like your argument is these people were just lucky.

I said I don’t care anymore about beating the SP500 and I do not know whether I’ll beat the index or the other way around. But I believe my stock picks will return more than 8% to 9% annually judging from their cashflow and yoy growth. And it looks like index only returns 8% to 9% and probably lower going forward.

I don’t think my stock picks are high risk because they are mostly blue chip stocks in their industries. Smaller companies can have even higher yield.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
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Re: Critical view of index investing

Post by Exchme »

gougou wrote: Sun Jun 20, 2021 11:22 pm There are many billionaires who got rich from investing in stocks (Buffett, Soros, Simons, Icahn etc) and none of them invested in index funds. They didn’t start with a whole lot of capital, so they must have beaten the market by a large margin. It looks like your argument is these people were just lucky.

I said I don’t care anymore about beating the SP500 and I do not know whether I’ll beat the index or the other way around. But I believe my stock picks will return more than 8% to 9% annually judging from their cashflow and yoy growth. And it looks like index only returns 8% to 9% and probably lower going forward.

I don’t think my stock picks are high risk because they are mostly blue chip stocks in their industries. Smaller companies can have even higher yield.
I wouldn't feel equipped to outdo Warren Buffet and even he hasn't beaten the market in 20+ years. You realize that as a non-indexer you are in direct competition with him, your other icons, other groups you mentioned like hedge funds plus every Wall Street wolf. As Bogleheads, we just say we'll let those active folks spend billions doing research, let them fight it out and we'll accept the consensus insights in the form of the Total Market. I will let others suggest reading material to you that will show that you are stupendously unlikely to beat that consensus, but I think you've made up your mind and only the school of hard knocks has a chance of changing your mind.

Please keep checking your actual performance against the market consensus (that you call average). If you decide you've had enough of trying to beat it, don't worry, we'll keep the light on for you so you can find your way home.
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Re: Critical view of index investing

Post by hnd »

Normchad wrote: Sun Jun 20, 2021 9:52 pm
gougou wrote: Sun Jun 20, 2021 7:22 pm I’m very skeptical of anyone saying that index investing is the holy grail of investing that beats 99% of active managed investing. I never heard of any billionaire who made their fortune from index investing. I don’t think rich people are all stupid to pay those fees to hedge funds/investment banks to manage their money.

Index investing is “average investing”. You buy all the companies, good or bad, overvalued or undervalued. If 90% of all the companies are bad/overvalued, you won’t get a good return buying them all. And we are probably in that situation today, so it may make sense to be very selective such as leaving out the trillion dollar companies or the bubble stocks like Tesla.

When the market is depressed and everything is cheap, that could be the right time to double down on the index.
You can back test the data. Passive index investing is far superior to active investing..... And in fact, due to behavioral errors, and people thinking they are smarter than they really are, simple S&P500 index investing performs much better than the average investor. Someplace, Fidelity mentioned that it's best performing accounts belonged to deceased people, or people who forgot they had accounts.....

The super wealthy didn't get that way by buying actively managed funds. And investing is great, because there is so much data we can actually look at. Index investors absolutely crush active investors over long time periods. It's a huge discrepancy.

But you say "the rich have hedge funds" that we can't see, and that we don't have access to. Well, Warren Buffet took on that challenge a while back. He challenge the hedge fund industry to a 10 year bet; and trounced them, by simply picking an S&P 500 index fund. It's interesting, because the hedge fund guys are "the smartest guys in the room"; and they can pick anything they want. Surely they can win, right? Nope. Cause nobody knows nothing.....
https://www.investopedia.com/articles/i ... a-brkb.asp
also keep in mind that our precious ivy league endowment fund managers struggle to come anywhere close to the markets return comparing similar asset allocation.
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Re: Critical view of index investing

Post by alex_686 »

gougou wrote: Sun Jun 20, 2021 7:22 pm I’m very skeptical of anyone saying that index investing is the holy grail of investing that beats 99% of active managed investing. I never heard of any billionaire who made their fortune from index investing. I don’t think rich people are all stupid to pay those fees to hedge funds/investment banks to manage their money.

Index investing is “average investing”. You buy all the companies, good or bad, overvalued or undervalued. If 90% of all the companies are bad/overvalued, you won’t get a good return buying them all. And we are probably in that situation today, so it may make sense to be very selective such as leaving out the trillion dollar companies or the bubble stocks like Tesla.

When the market is depressed and everything is cheap, that could be the right time to double down on the index.
Passive investing is the slow and steady way to become rich. It requires no special skills. There are a fair number of billionaires who use passive investing as the foundation for their portfolio. Of course, these people were born rick.

However, to become a billionaire it is necessary but not sufficient to actively invest. I have know smart driven guys who have tried and failed.

As a counter-example, would you recommend to a high school senior that they should become a professional athlete or actor? Some make fantastic money. Most, even very talented ones, don't. Or would you recommend that they become a accountant, nurse, or engineer? Less glamor, but on average a higher money maker? Well, it depends on the kid, doesn't it?
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Re: Critical view of index investing

Post by Marmot »

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, 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.
Rule number one is "Cardio", we all know that.
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Re: Critical view of index investing

Post by alex_686 »

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.
You are missing the mark.

In a up market you get the average return. It does not matter if you are passive or active. It is how averages work. It is hard to beat the index in a up market. However, In a down market you also get the average return. It is just as hard to beat the market in a down market. It is not like a magic door opens up in a down market.

See my post above. Yeah, you can make above market returns if you have some combination of skill and luck. If not, stick to passive.

You do have a point. I would say that investors in the public equity market have had a uniquely blessed time over the past 70 years. In particular, for US investors. Relatively high returns for low risk. Like shooting fish in a barrel. I expect the next 40 years to be tougher. Lower returns, higher risk. More like the Japanese stock market.
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secondo
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Re: Critical view of index investing

Post by secondo »

I haven't seen the numbers run, but I think an index actually does slightly better than average (even ignoring fees) in an up market because the index isn't holding cash and many active funds are holding cash. In a down market the author in the OP is right ignoring fees, you do worse than average because you aren't holding cash and the active funds are holding cash so they don't go down as much.

Although that is true it doesn't help. One could just leave some money in cash to gain this benefit in down markets while using an index, but that costs you in up markets. As mentioned above if we knew when the market was going down that would help, but we don't.

Leveraged funds could warp these results, of course, but again you could apply leverage to indices if you wanted to copy that detail.
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Re: Critical view of index investing

Post by alex_686 »

secondo wrote: Mon Jun 21, 2021 10:47 am I haven't seen the numbers run, but I think an index actually does slightly better than average (even ignoring fees) in an up market because the index isn't holding cash and many active funds are holding cash.
That was true in the past, say before. 2000. I don't think it is true any longer. There has been a shift in thinking. Trading costs have basically gone to zero, so the cost of cash flow management has dropped. There is also a great emphasis on linking performance to a index, so managers don't want any cash drag. Tactically allocation to cash is now down at the account level, not fund.
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Re: Critical view of index investing

Post by reln »

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.
What matters is fees. Not indexing vs active.
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Re: Critical view of index investing

Post by gougou »

Exchme wrote: Mon Jun 21, 2021 7:39 am
gougou wrote: Sun Jun 20, 2021 11:22 pm There are many billionaires who got rich from investing in stocks (Buffett, Soros, Simons, Icahn etc) and none of them invested in index funds. They didn’t start with a whole lot of capital, so they must have beaten the market by a large margin. It looks like your argument is these people were just lucky.

I said I don’t care anymore about beating the SP500 and I do not know whether I’ll beat the index or the other way around. But I believe my stock picks will return more than 8% to 9% annually judging from their cashflow and yoy growth. And it looks like index only returns 8% to 9% and probably lower going forward.

I don’t think my stock picks are high risk because they are mostly blue chip stocks in their industries. Smaller companies can have even higher yield.
I wouldn't feel equipped to outdo Warren Buffet and even he hasn't beaten the market in 20+ years. You realize that as a non-indexer you are in direct competition with him, your other icons, other groups you mentioned like hedge funds plus every Wall Street wolf. As Bogleheads, we just say we'll let those active folks spend billions doing research, let them fight it out and we'll accept the consensus insights in the form of the Total Market. I will let others suggest reading material to you that will show that you are stupendously unlikely to beat that consensus, but I think you've made up your mind and only the school of hard knocks has a chance of changing your mind.

Please keep checking your actual performance against the market consensus (that you call average). If you decide you've had enough of trying to beat it, don't worry, we'll keep the light on for you so you can find your way home.
I'm not trying to beat Buffett, I'm just trying to earn something like a 15% return instead of the long term average of 8% to 9% from an index fund. Even if someone do get 15% return per year it will take them 50 years to grow $1M to $1B, so Buffett must have done a lot better than that. I believe by carefully picking stocks I can achieve a 15% return over the long term with a very high probability. And generally I don't feel like buying companies/businesses that trade at 30x P/E or even more than that, which account for a large portion of the SP500 today.

I think I'm 99% likely to earn more than 8% to 9% annual total return if I just keep buying rental properties with a little bit of leverage. But some publicly traded stocks/businesses seem to have even better expected return than simply buying rental properties, so I'm willing to allocate some capital to those companies.

If I talk about my track record, I guess you'll just say I'm lucky. So there's no point in doing that. And I repeat, I have no interest in beating the S&P 500 or compete with it. But I think it's also impossible for you to prove that your index fund is superior to my investment strategies, or my rental properties.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
gougou
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Re: Critical view of index investing

Post by gougou »

alex_686 wrote: Mon Jun 21, 2021 9:37 am
gougou wrote: Sun Jun 20, 2021 7:22 pm I’m very skeptical of anyone saying that index investing is the holy grail of investing that beats 99% of active managed investing. I never heard of any billionaire who made their fortune from index investing. I don’t think rich people are all stupid to pay those fees to hedge funds/investment banks to manage their money.

Index investing is “average investing”. You buy all the companies, good or bad, overvalued or undervalued. If 90% of all the companies are bad/overvalued, you won’t get a good return buying them all. And we are probably in that situation today, so it may make sense to be very selective such as leaving out the trillion dollar companies or the bubble stocks like Tesla.

When the market is depressed and everything is cheap, that could be the right time to double down on the index.
Passive investing is the slow and steady way to become rich. It requires no special skills. There are a fair number of billionaires who use passive investing as the foundation for their portfolio. Of course, these people were born rick.

However, to become a billionaire it is necessary but not sufficient to actively invest. I have know smart driven guys who have tried and failed.

As a counter-example, would you recommend to a high school senior that they should become a professional athlete or actor? Some make fantastic money. Most, even very talented ones, don't. Or would you recommend that they become a accountant, nurse, or engineer? Less glamor, but on average a higher money maker? Well, it depends on the kid, doesn't it?
There are superstar investors who are extremely smart, they became those billionaire investors I mentioned. But for every such superstar, there must be plenty of other successful investors who adhered similar principles, used similar strategies, who didn't get that far but still fairly successful, and probably still beaten the market index by a reasonable amount over a long period of time.

If index investing is so superior, why are there no billionaire investors at the top who made their fortune from it? If you look at those top investors, they are all active managers. They made their fortune from value investing, activist investing, etc. If you don't see index investing up there, it probably means it is a pretty mediocre way of investing.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
alex_686
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Re: Critical view of index investing

Post by alex_686 »

gougou wrote: Mon Jun 21, 2021 1:30 pm I'm not trying to beat Buffett, I'm just trying to earn something like a 15% return instead of the long term average of 8% to 9% from an index fund. Even if someone do get 15% return per year it will take them 50 years to grow $1M to $1B, so Buffett must have done a lot better than that. I believe by carefully picking stocks I can achieve a 15% return over the long term with a very high probability. And generally I don't feel like buying companies/businesses that trade at 30x P/E or even more than that, which account for a large portion of the SP500 today.

I think I'm 99% likely to earn more than 8% to 9% annual total return if I just keep buying rental properties with a little bit of leverage. But some publicly traded stocks/businesses seem to have even better expected return than simply buying rental properties, so I'm willing to allocate some capital to those companies.

If I talk about my track record, I guess you'll just say I'm lucky. So there's no point in doing that. And I repeat, I have no interest in beating the S&P 500 or compete with it. But I think it's also impossible for you to prove that your index fund is superior to my investment strategies, or my rental properties.
I used to do performance attribution. I modestly believe in active management. I think you are very optimistic. A couple of points.

It is harder than you think.

I hope you can bear the risk, both in terms of ability and psychologically. I think going forward equity returns will be closer to 6%.

I tend to doubt such statements due to behavioral and cognitive issues. It is hard to attribute performance, the difference due to luck, risk, and skill. People fall into all types of mental traps.

Skill works until it no longer does. I have seen some great managers constitutionally beat their index for years due to skill, not luck or risk. Fundamental analysis, sector rotation, deep value, quantitative, etc. Then there is a sea change in the market. Then they start striking out hard. Sometimes the style comes back into favor, other times not. So be aware.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Makefile
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Re: Critical view of index investing

Post by Makefile »

gougou wrote: Mon Jun 21, 2021 1:44 pm There are superstar investors who are extremely smart, they became those billionaire investors I mentioned. But for every such superstar, there must be plenty of other successful investors who adhered similar principles, used similar strategies, who didn't get that far but still fairly successful, and probably still beaten the market index by a reasonable amount over a long period of time.

If index investing is so superior, why are there no billionaire investors at the top who made their fortune from it? If you look at those top investors, they are all active managers. They made their fortune from value investing, activist investing, etc. If you don't see index investing up there, it probably means it is a pretty mediocre way of investing.
Your argument sounds like the Fidelity president's response to the launch of the first index fund. “I can’t believe that the great mass of investors are [sic] going to be satisfied with just receiving average returns. The name of the game is to be the best.”

We aren't trying to become billionaires. We're just trying to set aside part of our income and have a decent chance of a secure retirement or maybe even better.

Index investing isn't designed to vault you to the top of the Fortune billionaire's list. You sacrifice your chance of getting into the next Microsoft on the ground floor by choosing passive investing. But you also avoid loading up on Enron too. You will be merely average. It's like if you went to college and had two choices: study, go for the A, risk the F, or have another "passive" option where you get an automatic B- in each course. In that case you wouldn't criticize the passive option on the basis that they haven't produced a single valedictorian.

I must ask, why continue to antagonize a forum centered on index investing? It's like going to a vegetarian recipe club and claiming they have horrible steak recipes.
Northern Flicker
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Re: Critical view of index investing

Post by Northern Flicker »

NostraHistoria wrote: Sat Jun 19, 2021 5:04 pm Some are good, and some are not good. I used to watch CNBC from about 2008 to 2012 or so. From what I remember, it seemed that the people on there are actively managing their portfolios. It is terrible for a Boglehead.
It is in the ho-hum, shrug your shoulders realm for someone committed to a passive retirement portfolio. I believe that it is terrible for people who think they can actively manage their retirement portfolios.
alex_686
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Re: Critical view of index investing

Post by alex_686 »

gougou wrote: Mon Jun 21, 2021 1:44 pm If index investing is so superior, why are there no billionaire investors at the top who made their fortune from it? If you look at those top investors, they are all active managers. They made their fortune from value investing, activist investing, etc. If you don't see index investing up there, it probably means it is a pretty mediocre way of investing.
I think you are misrepresenting what passive investing it. Passive investing is a little like the Honda Accord. Not flashy, but is suitable for most people. Great value for its money.

There is no surer way to for a person to build wealth. Slow, steady, and disciplined wins the game. Mediocre? No. Average? Maybe. However, those that follow the principles of passive investing come out ahead of their peers 90% of the time.

Will it get you that private airplane or yacht? No.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
esteen
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Re: Critical view of index investing

Post by esteen »

gougou wrote: Mon Jun 21, 2021 1:44 pm If index investing is so superior, why are there no billionaire investors at the top who made their fortune from it? If you look at those top investors, they are all active managers. They made their fortune from value investing, activist investing, etc. If you don't see index investing up there, it probably means it is a pretty mediocre way of investing.
The returns spread of the index investor is zero (if they all invest in the same index). The returns spread of active investors in those same asset classes are wide-ranging. Yes, there are no billionaire investors at the top who made their fortune from indexing - it's mathematically impossible, because as many have pointed out, you're getting the average (or above-average post-cost) returns. Not exceptional returns. Not one-in-a-million returns.

For all the active players, there are a few who were so good + lucky that they became the top - the extreme right tail of the curve. But you're not naming any of those on the left side of the curve. You can't, because they're not household names, because they're not billionaires!

Many studies including SPIVA and Morningstar's results show that over time, the left side (losing side) of that return curve holds a far greater number of active investors, post-fees, than the right side does. It depends on the market segment, time horizon, etc, but figures in the 70-90% "losers" are common. That means there are some winners, maybe 10-30% (less as time horizon increases.) And a tiny fraction of those winners are uber-winners - skyrocketing their wealth far beyond what index investing can do.

Given that robust data, I had to answer myself two questions before I committed to a type of investing (active or passive):
1) was it all skill & resources, luck + skill, or mostly luck that created the outperformers?
a) again, data shows that it was likely mostly luck, due to inability for individual fund managers to continue to outperform across multiple periods. I think there are some, but a minority, where it was mostly skill.
2) if there is enough skill & resources to consistently outperform even with average luck (since luck is an external uncontrolled variable), do I have that skill and those resources to outperform?

I think the answer to #1 is "mostly luck"
I think the answer to #2, even if there was more skill than I presume from the available data, is "hell no" for me.

-ES
This post is for entertainment or information only, and should not be construed as professional financial advice. | | "Invest your money passively and your time actively" -Michael LeBoeuf
Northern Flicker
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Re: Critical view of index investing

Post by Northern Flicker »

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.
While I don't believe anyone can predict which market will overperform, if one nonetheless wanted to be foolhardy and implement such a strategy, index funds, particularly ETFs, would be a very efficient vehicle for doing so because you can move in and out of a market easily, and will know what you are holding when you invest in a market.

But such a strategy is not recommended. It would expose the portfolio to timing risk with no additional expected return as compensation.
Northern Flicker
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Re: Critical view of index investing

Post by Northern Flicker »

gougou wrote: There are many billionaires who got rich from investing in stocks (Buffett, Soros, Simons, Icahn etc) and none of them invested in index funds. They didn’t start with a whole lot of capital, so they must have beaten the market by a large margin. It looks like your argument is these people were just lucky.
I don't know how much luck was involved with their success, but I do know that I would have to be extremely lucky to become a billionaire by investing in individual stocks. I'm fairly certain that the list of people who got creamed trying to do that is far longer, and most likely would include myself had I tried to do that.
gougou wrote: If index investing is so superior, why are there no billionaire investors at the top who made their fortune from it?
Because index investing gives you the market return, you get no more and no less. A passive investor is content not to become a billionaire from their investment returns as a nice tradeoff for having a very low probability of underperforming the market.
Northern Flicker
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Re: Critical view of index investing

Post by Northern Flicker »

gougou wrote: I'm not trying to beat Buffett, I'm just trying to earn something like a 15% return instead of the long term average of 8% to 9% from an index fund. Even if someone do get 15% return per year it will take them 50 years to grow $1M to $1B, so Buffett must have done a lot better than that.
Buffett is the CEO of an auto insurer and reinsurer. The investment portfolio return is just one part of the growth. I've never looked at the BRK books and balance sheet, so I'm speaking in general terms, but I believe much of the capital to buy the investments held comes from insurance premiums and other business profits.
Last edited by Northern Flicker on Tue Jun 22, 2021 2:04 pm, edited 2 times in total.
Northern Flicker
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Re: Critical view of index investing

Post by Northern Flicker »

alex_686 wrote: In a up market you get the average return. It does not matter if you are passive or active. It is how averages work. It is hard to beat the index in a up market. However, In a down market you also get the average return. It is just as hard to beat the market in a down market. It is not like a magic door opens up in a down market.
You can take more risk than the market, and most often beat the market in an up market, and most often underperform the market in a down market. This is how many actively managed stock mutual funds are managed.

You can take less risk than the market, and most often underperform during an upmarket and most often underperform in a down market. Minimum volatility equity funds are designed to behave like this.

I made a point of saying most often above because there are no guarantees or hard and fast rules.
Northern Flicker
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Re: Critical view of index investing

Post by Northern Flicker »

gougou wrote: I’m very skeptical of anyone saying that index investing is the holy grail of investing that beats 99% of active managed investing.
You should be skeptical of that because it is untrue. If you look at SPIVA data you will see that typically 65-85% of active managers underperform their benchmark index. This is true in both up and down markets.

https://www.spglobal.com/spdji/en/docum ... d-2008.pdf

For the sake of discussion, let's assume that precisely 25% of active managers beat their market index. This means you have a 1 in 4 chance of beating the market with an active fund selected at random in a given year. But it is not always the same 25%. So you have the problem of selecting the right active manager at the tight time. The odds are against you. But I do know that my odds of beating the market with my own stock selection is even lower.

If someone wants to try to beat the market by taking more risk, factor theory provides a systematic framework for trying to do that. Low cost factor-tilted funds and low-cost actively managed funds are reasonable attempts as long as you understand the risks. There are no guarantees:

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D
fwellimort
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Re: Critical view of index investing

Post by fwellimort »

Exchme wrote: Mon Jun 21, 2021 7:39 am I wouldn't feel equipped to outdo Warren Buffet and even he hasn't beaten the market in 20+ years.
I know this is quoted everywhere in the Internet but a simple fact check will prove wrong.
Berkshire Hathaway had greater returns than the market past 20 years (and once you go 20+, that's when you really include Berkshire Hathaway's outliar returns + Market going through dot com bubble).
You probably mean from 2008 onwards (which is unfair as a comparison because the companies he invested in didn't all "crash" (even if his share price did). It's easier to fly up from rock bottom).

It's actually amazing how well Berkshire Hathaway has done historically considering how much cash the company has (and how large the company is).
It's a cash drag company that has done well even with a huge market cap.
Even Buffett has been consistently admitting that the size of Berkshire Hathaway is making the world of investing 'difficult'.
(After all, it's easier for $1 million market cap company to become 80 million than for $600+ billion market cap company to go 80x).

There are plenty of professionals that beat the market by a noticeable margin consistently over long periods of time. However, they are a tiny subset of people.
I look at the stock market as a 'winner takes all' game long term.
If you read through James Simons, Li Lu, Nick Sleep, etc., then you quickly realize how much work some of those people had to do to beat the market.
Some of them in my opinion deserved the luck. While most professionals go to work 9 to 5 everyday, some of these investors that beat the market:
* Checked each company (including traveling abroad to check each factory)
* Talk to the managers of the company
* Talk to the family members (of the management) and the local villagers of the CEO's hometown.
* Go to Court to actively support the company
* Go to forests, visit countries with instability (e.g.: Zimbabwe), etc.
* Creating new branches of mathematics (all to make money? That's quite hard core.)
* Buy multiple companies together so those companies can be more efficient (maybe the company uses railroad a lot and you realize if you can buy the railroad industry, you can have both companies benefit, etc.)
* Buy all sorts of data out there and doing mathematical modeling on them (e.g.: machine learning) before the rest of Wall Street figured out such possibility
* etc.
How many people do you know would do all that to invest in a stock? Some of them even took 0 fees unless they performed more than X% and if they made negative returns, they would continuously 'refund' the fees that year (until the refunding was over). All the while also putting their own money to the table.

Truth is, beating the market while a do-able endeavor is something that can be life consuming. To know more than the market, you pretty much have to constantly move around (and study) instead of relaxing and enjoying life with your family members.

Index investing is great for the average investor who isn't going to do any of this and are content with market returns.
The average investor doesn't know how to value companies. The average investor doesn't know how lithium batteries are made (and the process/shipping/etc).
And unfortunately, most professionals want to also keep their jobs so they cannot afford to take extreme risks. There are also rules in place (e.g. mutual funds) so that funds can't be concentrated on certain stocks.

Index investing would have been horrible in some parts of the world like Japan, etc. .
We invest in the index with the belief that in our lifetime, markets will go up.
It's no guarantee. But we believe. And we believe that as the markets will go up over long periods of time, that we need to find some way to actively participate in the market.
And unfortunately, as we are not professionals in the field, we have to choose investment vehicles best suited to grab these returns.
And that's basically what an index fund (the average return without the notable fees). Plus, what professional wants to do more than the job requires (sit in office 9 to 5). I certainly have no thoughts of working 8 am to 11 pm for my company including weekends/holidays. Why should we expect that out of professionals.

If you want to be 'rich' (e.g.: billions), then you have to concentrate. Look at people like Bill Gates or Jeff Bezos. They created companies like Amazon (and held the shares).
If you don't need that in life (at least I don't), then just index. You will most likely come out much better than you expected/need in your life.

I have been really lucky with my single stock picking since 2018. I have greatly 'beaten' the market. But the sum of money has been so small that it makes no difference. It's very difficult to take huge risks (relative to market) when you don't have to (and will get the market risk regardless).
In fact, out of 8 of my friends (and my brother), all of them I know beat the market. But guess what. No one dares to put more than a few thousand cause no one is confident that he/she can beat the market. So it really means nothing end of day.
You can argue 'we were just lucky cause tech boomed from covid'. But the market is supposed to 'be efficient' so regardless of bear/bull, this shouldn't be the case according to Efficient Market Hypothesis.
I recall every year when I asked the web 'Amazon/Google/Microsoft seem to keep bigger without stop' for stock picking, each year, every poster replied, "Markets are efficent! Do you think you know more than the market?". And each year that has been proven wrong. But at same time, I too agreed cause 'these companies can't keep getting bigger' and since 'markets are efficient'. At some point, those redditors will be right. Who knows. I sincerely feel my MSFT and GOOGL shares are currently priced at the stage of euphoria. But, I'm a lazy buy and holder so I'll just ignore. I like the companies.
Markets are efficient in the sense that everything feels overvalued to the point people are paralyzed to put more money into each company. That's really it. There's nothing stopping companies like Tencent and Alibaba from beating the market 5 years down the line.
The market is determined by active buyers. And information is asymmetrical within active investors. Some people just buy cause they mis-typed the ticker name while others buy after spending thousands of hours of research on the company. That's just it.
Last edited by fwellimort on Mon Jun 21, 2021 4:25 pm, edited 8 times in total.
gougou
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Re: Critical view of index investing

Post by gougou »

Makefile wrote: Mon Jun 21, 2021 2:19 pm
gougou wrote: Mon Jun 21, 2021 1:44 pm There are superstar investors who are extremely smart, they became those billionaire investors I mentioned. But for every such superstar, there must be plenty of other successful investors who adhered similar principles, used similar strategies, who didn't get that far but still fairly successful, and probably still beaten the market index by a reasonable amount over a long period of time.

If index investing is so superior, why are there no billionaire investors at the top who made their fortune from it? If you look at those top investors, they are all active managers. They made their fortune from value investing, activist investing, etc. If you don't see index investing up there, it probably means it is a pretty mediocre way of investing.
Your argument sounds like the Fidelity president's response to the launch of the first index fund. “I can’t believe that the great mass of investors are [sic] going to be satisfied with just receiving average returns. The name of the game is to be the best.”

We aren't trying to become billionaires. We're just trying to set aside part of our income and have a decent chance of a secure retirement or maybe even better.

Index investing isn't designed to vault you to the top of the Fortune billionaire's list. You sacrifice your chance of getting into the next Microsoft on the ground floor by choosing passive investing. But you also avoid loading up on Enron too. You will be merely average. It's like if you went to college and had two choices: study, go for the A, risk the F, or have another "passive" option where you get an automatic B- in each course. In that case you wouldn't criticize the passive option on the basis that they haven't produced a single valedictorian.

I must ask, why continue to antagonize a forum centered on index investing? It's like going to a vegetarian recipe club and claiming they have horrible steak recipes.
I'm not antagonizing this forum. This thread is named "Critical view of index investing" so I am exactly on topic.

What I dislike about index investing is that it merely gives you an average return if you have the stomach to hold for a very long time. Theoretically you could just randomly pick a bunch of stocks and you would beat the index with a 50% likelihood. But index investing is spoken like it's the best way to invest, beats 90% of hedge funds, suitable for everybody at any time. Any deviation from it is strongly discouraged (because you are going to be beaten). Anyone who consistently beat the index is just lucky.

And it seems to me when the index is doing well and holding mostly overvalued companies, more people are drawn into the game. These people know nothing about investing, but they just plow everything into the index fund and believe they are golden.

Index fund holds so many companies such that it largely obscures what exactly people are investing in. In my opinion that's completely against the rule that you should "Invest in what you know".
The sillier the market’s behavior, the greater the opportunity for the business like investor.
gougou
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Re: Critical view of index investing

Post by gougou »

Northern Flicker wrote: Mon Jun 21, 2021 3:36 pm
gougou wrote: I’m very skeptical of anyone saying that index investing is the holy grail of investing that beats 99% of active managed investing.
You should be skeptical of that because it is untrue. If you look at SPIVA data you will see that typically 65-85% of active managers underperform their benchmark index. This is true in both up and down markets.

https://www.spglobal.com/spdji/en/docum ... d-2008.pdf

For the sake of discussion, let's assume that precisely 25% of active managers beat their market index. This means you have a 1 in 4 chance of beating the market with an active fund selected at random in a given year. But it is not always the same 25%. So you have the problem of selecting the right active manager at the tight time. The odds are against you. But I do know that my odds of beating the market with my own stock selection is even lower.

If someone wants to try to beat the market by taking more risk, factor theory provides a systematic framework for trying to do that. Low cost factor-tilted funds and low-cost actively managed funds are reasonable attempts as long as you understand the risks. There are no guarantees:

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D
Sure I was exaggerating when I said 99%. But I'm interested in such a theoretical question: if I just randomly pick a bunch of stocks from SP500 and invest in them and forget about them, would I beat the index 50% of the times? Why should everybody faithfully buy the whole index components proportional to their market cap, and keep rebalancing day after day?

And then if I believe my active management adds a bit of value to random picking, then it's very plausible to me that I should be picking my investments.
Last edited by gougou on Mon Jun 21, 2021 4:37 pm, edited 2 times in total.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
esteen
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Re: Critical view of index investing

Post by esteen »

gougou wrote: Mon Jun 21, 2021 4:06 pm
Makefile wrote: Mon Jun 21, 2021 2:19 pm
gougou wrote: Mon Jun 21, 2021 1:44 pm There are superstar investors who are extremely smart, they became those billionaire investors I mentioned. But for every such superstar, there must be plenty of other successful investors who adhered similar principles, used similar strategies, who didn't get that far but still fairly successful, and probably still beaten the market index by a reasonable amount over a long period of time.

If index investing is so superior, why are there no billionaire investors at the top who made their fortune from it? If you look at those top investors, they are all active managers. They made their fortune from value investing, activist investing, etc. If you don't see index investing up there, it probably means it is a pretty mediocre way of investing.
Your argument sounds like the Fidelity president's response to the launch of the first index fund. “I can’t believe that the great mass of investors are [sic] going to be satisfied with just receiving average returns. The name of the game is to be the best.”

We aren't trying to become billionaires. We're just trying to set aside part of our income and have a decent chance of a secure retirement or maybe even better.

Index investing isn't designed to vault you to the top of the Fortune billionaire's list. You sacrifice your chance of getting into the next Microsoft on the ground floor by choosing passive investing. But you also avoid loading up on Enron too. You will be merely average. It's like if you went to college and had two choices: study, go for the A, risk the F, or have another "passive" option where you get an automatic B- in each course. In that case you wouldn't criticize the passive option on the basis that they haven't produced a single valedictorian.

I must ask, why continue to antagonize a forum centered on index investing? It's like going to a vegetarian recipe club and claiming they have horrible steak recipes.
I'm not antagonizing this forum. This thread is named "Critical view of index investing" so I am exactly on topic.

What I dislike about index investing is that it merely gives you an average return if you have the stomach to hold for a very long time. Theoretically you could just randomly pick a bunch of stocks and you would beat the index with a 50% likelihood. But index investing is spoken like it's the best way to invest, beats 90% of hedge funds, suitable for everybody at any time. Any deviation from it is strongly discouraged (because you are going to be beaten). Anyone who consistently beat the index is just lucky.

And it seems to me when the index is doing well and holding mostly overvalued companies, more people are drawn into the game. These people know nothing about investing, but they just plow everything into the index fund and believe they are golden.

Index fund holds so many companies such that it largely obscures what exactly people are investing in. In my opinion that's completely against the rule that you should "Invest in what you know".
I don't think you're antagonizing the forum, and I hope you don't take my prior reply as antagonizing you. I think these discussions are worthy debates, even if the preponderance of forum members are on one side of that debate.

I get that you don't feel comfortable with index investing and believe your abilities to be sufficiently superior to create consistent outsized returns. I have no problem with you thinking that, but I don't think that about myself, and I don't think that about any investor I've ever met. So godspeed to you in your quest to outperform, but I think anyone who does should do so with both eyes open.

Oh, another important thing about active investing in my opinion, is that every active investor should find a way to consistently and objectively evaluate their own performance. I don't know your plan on that front, but nearly every active investor I have known does not keep detailed records on their overall performance (usually cherry-picking the "wins" in conversation, and brushing off the losses as "haven't looked into it that much"). Not saying you will do this- just saying you should be on guard for falling into this trap because I think it's human nature.
This post is for entertainment or information only, and should not be construed as professional financial advice. | | "Invest your money passively and your time actively" -Michael LeBoeuf
Cartographer
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Re: Critical view of index investing

Post by Cartographer »

gougou wrote: Mon Jun 21, 2021 4:06 pm What I dislike about index investing is that it merely gives you an average return if you have the stomach to hold for a very long time. Theoretically you could just randomly pick a bunch of stocks and you would beat the index with a 50% likelihood. But index investing is spoken like it's the best way to invest, beats 90% of hedge funds, suitable for everybody at any time. Any deviation from it is strongly discouraged (because you are going to be beaten). Anyone who consistently beat the index is just lucky.
I think you are committed to your philosophy, but I'll nevertheless try to persuade you that your logic is wrong.

Consider two investors. On day 1, Alice simply buys an S&P500 index. Bob randomly picks a few stocks in the S&P500, and buys them. The initial size of the portfolios are the same, and both keep their holdings and never change them for 30 years, at which point they liquidate. Mathematically, the expected value of their portfolios will be 100% identical*. However, Bob has a much larger variance of outcomes - perhaps he won the lottery and became a billionaire. Or perhaps he got really unlucky and ended up buying companies that went bankrupt. Alice will have a variance of outcomes too, exactly the variance of the index. But Bob's variability include Alice's variability, plus an additional variability as a result of picking a random subset of stocks. This is just a mathematical fact.

The probability Bob beats Alice is most likely not 50%, and will depend on the distribution of returns of the stocks making up the index. Individual stock returns seem highly skewed with a very long tail. This makes Bob's probability of beating Alice likely somewhat less than 50%. Nevertheless, the expectation of Bob's outcomes matches Alice; it's just that he has a low probability of beating Alice significantly, to "make up for" the high probability of losing to Alice by a modest amount.

Now, the above assume Bob held onto his stocks the entire 30 years. In reality, Bob is probability changing is stock allocation every few years (or even every few days?!). Let's say every year he randomly selects new stocks. During each year, the above analysis still applies: Bob's expected returns match Alice's, but with much higher variance. The problem, sometimes called volatility drag, is that as these returns compound over 30 years, the equality of expected values no longer holds, and Bob's (expected) performance will be substantially worse than Alice's due to the volatility. Again, this is just a mathematical fact. You can see it intuitively: let's say every year Alice gets 10% (to keep the math easy) while Bob earns -10% or 30%, each with equal probability (which averages to match Alice's 10%). The problem is that Bob will get a mix of good and bad years, and they don't exactly cancel: a -10% year followed by a 30% year only nets 17%, as opposed to Alice's 21%. Compound that over 30 years, and you get that Alice beats Bob by something like 80% in this example.

So random stock picking is mathematically guaranteed to lose to indexing over the long run, and guaranteed to lose by a significant margin.

Now, maybe you claim that your stock picking is not random, but based on some special insight you have. Maybe you are an above-average investor. But for Bob to beat Alice, not only must he be an above-average investor, but he must be so far above average so as to be able to overcome the significant drag of stock picking. Are there such investors out there? Maybe. The probability you are among them? Darn close to zero.



* Ignoring fees. Also, technically, this is only true if Bob picks each stock with probability proportional to its market weight. But similar statements can be made for non-market-weighted selections.
Northern Flicker
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Re: Critical view of index investing

Post by Northern Flicker »

gougou wrote: Sure I was exaggerating when I said 99%. But I'm interested in such a theoretical question: if I just randomly pick a bunch of stocks from SP500 and invest in them and forget about them, would I beat the index 50% of the times? Why should everybody faithfully buy the whole index components proportional to their market cap, and keep rebalancing day after day?
One of the main points of a cap-weighted index is that you don't have to rebalance in response to market movements.

Yes, if you hold a sufficiently large random of SP500 stocks held at cap weight would have an expected return that matched the S&P500 but it would take more risk, and you would struggle to implement it as cheaply as the SP500.

SPIVA data is net of fees. Active managers have a greater than 50% chance of beating their reference index before fees are accounted for. But once costs are factored in, the chance of doing so is cut in half.
gougou wrote: What I dislike about index investing is that it merely gives you an average return if you have the stomach to hold for a very long time.
You don't have to hold a long time to get the market return. An index fund gives you that every day. Passive investing is not a get-rich-quick scheme. Sometimes it takes a few mishaps and misfires for an investor to realize that those types of schemes carry far more risk than passive investing.
Dyloot
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Re: Critical view of index investing

Post by Dyloot »

On the earlier discussions on Warren Buffett, the man did not build his wealth simply picking stocks. I’d recommend anyone interested in how he did it read this book.

https://www.amazon.com/Snowball-Warren- ... 006&sr=8-1

It’s fantastic.
gubernaculum
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Re: Critical view of index investing

Post by gubernaculum »

gougou wrote: Sun Jun 20, 2021 11:22 pm
Exchme wrote: Sun Jun 20, 2021 9:36 pm
gougou wrote: Sun Jun 20, 2021 7:22 pm I’m very skeptical of anyone saying that index investing is the holy grail of investing that beats 99% of active managed investing. I never heard of any billionaire who made their fortune from index investing. I don’t think rich people are all stupid to pay those fees to hedge funds/investment banks to manage their money.

Index investing is “average investing”. You buy all the companies, good or bad, overvalued or undervalued. If 90% of all the companies are bad/overvalued, you won’t get a good return buying them all. And we are probably in that situation today, so it may make sense to be very selective such as leaving out the trillion dollar companies or the bubble stocks like Tesla.

When the market is depressed and everything is cheap, that could be the right time to double down on the index.
gougou wrote: Sun Jun 20, 2021 7:40 pm That’s good for you, and you probably did well. I also made some good money from SP500 in the past. But recently I cashed out all my index funds and doubled down on investing for cashflow and undervalued stocks. I’ll happily take my 8%+ cashflow plus annual growth on my portfolio under some reasonable assumptions. I don’t care if I can beat the index or not.
How do you get from "rich people" and their army of advisors must be able to beat the market (there is no evidence for that, but let's follow you anyway), to therefore you are going to beat the market too even though you don't have any of those special advisors? Why aren't rich people with their special insight snapping up all the super high yield bargains you are buying?

Anything paying 8+% in this low interest rate environment must have serious risks attached to it. Maybe you get lucky and it works out, but that's the math of active management, the % of people that beat the market over time is indistinguishable from random chance.
There are many billionaires who got rich from investing in stocks (Buffett, Soros, Simons, Icahn etc) and none of them invested in index funds. They didn’t start with a whole lot of capital, so they must have beaten the market by a large margin. It looks like your argument is these people were just lucky.

I said I don’t care anymore about beating the SP500 and I do not know whether I’ll beat the index or the other way around. But I believe my stock picks will return more than 8% to 9% annually judging from their cashflow and yoy growth. And it looks like index only returns 8% to 9% and probably lower going forward.

I don’t think my stock picks are high risk because they are mostly blue chip stocks in their industries. Smaller companies can have even higher yield.
As long as you invested in 30+ stocks, you got an index.
fwellimort
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Re: Critical view of index investing

Post by fwellimort »

gubernaculum wrote: Mon Jun 21, 2021 6:05 pm As long as you invested in 30+ stocks, you got an index.
This. I pretty much agree with this.

If you are against indexing but are investing in like 50+ index, you are basically doing something called a 'closet index' (still substantially more risk than market risk).
The more you diversify, the more risk you tend to spread (unless you know how to evaluate risk on each company which means you know how to value stocks [you are professional in this field]) as an average retail investor. And closer your stock market returns are to the market returns itself.

At that point, even if there's no trade fees (including no pfof) and you do all this in a tax advantaged account, why the hassle. If you getting near identical returns, there really wasn't a point not indexing from the start.
Might as well just buy an index fund and be done with it. If you want closer to equal weight index, then just bias more towards mid and small cap indices.

Another approach is 'take out the bad companies' in the index.
There's been studies that show that while people as a whole are bad at judging which stocks will outperform the market in any given year, people are very good at finding what companies will underperform (or maybe cause they pick underperforming companies regardless).
The problem with this approach is you can say 'AMC is overvalued currently'. But the companies the market overall notices is overvalued/poorly run are already so tiny in market cap that it really doesn't budge your CAVG returns long term. Maybe like 0.02% or whatever which is quite nothing for all that pain.
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