Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock in th

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
Jack&Warren disciple
Posts: 120
Joined: Sat Sep 11, 2021 9:46 am

Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock in th

Post by Jack&Warren disciple »

https://www.wsj.com/amp/articles/trilli ... 1634745118

Fun article reviewing the book: "Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever," a chronicle of financial innovation by Robin Wigglesworth, a correspondent for the Financial Times. "

Some interesting facts from the above linked article:

"The first index fund was created in the early 1970s by "bullheaded" John (Mac) McQuown at Wells Fargo bank. The idea of indexing drew widespread criticism, including condemnation from Wells Fargo's own trust department. While the fund never accumulated much institutional money ("I wouldn't even buy it for my mother-in-law," one institutional investor said), it proved to be the beginning of a revolution.

In 1976 John Bogle created the first index fund that was available to individual investors. Bogle had been fired from his position at the Wellington Management Co. following irreparable personality clashes with the Boston managers. Determined that his new firm, Vanguard, should have its own stable of funds, and familiar with the growing evidence that actively managed funds didn't tend to beat the market, he launched the First Index Investment Trust; it tracked the S&P 500 stock index.

The fund was to be started with an initial public offering of $150 million, underwritten by a group of big Wall Street firms. The IPO was an abject failure. Only $11 million was raised, and the fund remained small for years. The press named the fund "Bogle's Folly." Critics claimed that index funds guaranteed mediocrity—even that they were un-American. But Bogle remained determined and promoted the index fund with messianic zeal. Eventually, index funds became commercially successful and the most disruptive force in investment management.

Another important actor in the indexing revolution was Nate Most. His personality was the opposite of the hard-charging McQuown and the evangelistic Bogle. Most was a "geeky, avuncular former physicist," as Mr. Wigglesworth puts it. His job at the American Stock Exchange, a struggling institution that was losing market share, was to find innovative products. He recommended an exchange-traded index fund. As it happens, I was a board member of the exchange, and, since a sponsor was required, I suggested that Most approach Bogle. He summarily rejected the idea: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock in the afternoon?" Eventually he was able to sell the idea to State Street Global Advisors, and the ETF revolution was under way. Within a decade, ETFs had changed not only the nature of indexing but also the entire field of investing, making passive management an acceptable and even an above-average method of investment management."

"Mr. Wigglesworth also considers the possibility that the indexing movement could have some harmful effects on the economy and distort markets, by having money invested in specific companies because of their inclusion in an index rather than because of their individual prospects."

While I haven't personally seen much to be critical about after index investing for decades, does Mr. Wigglesworth seem to have a legitimate beef, and if so, wouldn't stock picking fund managers be able to outperform the index fund investor? But will the stock picking fund manager be able to consistently outperform the market index investor to compensate for higher fees?
User avatar
nedsaid
Posts: 19249
Joined: Fri Nov 23, 2012 11:33 am

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by nedsaid »

Active management CAN work, the biggest reason for failure is the drag from fees. Plus you would figure that half of the managers would outperform and half would underperform. The broad index funds are most often in the top quartile in performance in any given year. Lots of folks had a V-8 moment and said, "I could have had an index fund."

Were I doing this all over again, probably 20% to 40% of my portfolio would be in low cost active funds and the remainder in index funds. I could also substitute low cost factor funds like DFA or Avantis for active management. I figure everyone has to chip in a bit to keep the markets efficient. :wink:
A fool and his money are good for business.
bhsince87
Posts: 2914
Joined: Thu Oct 03, 2013 1:08 pm

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by bhsince87 »

Companies only make it into most indexes because they have already achieved a certain amount of success.

And they leave when they've had a certain amount of failure.

Still seems "marketish" to me.
Time is what we want most, but what we use worst. William Penn
000
Posts: 8211
Joined: Thu Jul 23, 2020 12:04 am

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by 000 »

Jack&Warren disciple wrote: Thu Oct 21, 2021 5:44 pm "Mr. Wigglesworth also considers the possibility that the indexing movement could have some harmful effects on the economy and distort markets, by having money invested in specific companies because of their inclusion in an index rather than because of their individual prospects."

While I haven't personally seen much to be critical about after index investing for decades, does Mr. Wigglesworth seem to have a legitimate beef, and if so, wouldn't stock picking fund managers be able to outperform the index fund investor?
Indexing may lead to corporate management becoming less accountable due to the difficulty a single firm must have overseeing thousands of corporations versus a smaller number of more concentrated investors. Becoming a stock picker won't save you from this problem though.

Another potential problem is that the availability of index funds makes it easier to enter and exit the whole market perhaps making both meltups and meltdowns of greater magnitude and quicker.
jarjarM
Posts: 2502
Joined: Mon Jul 16, 2018 1:21 pm

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by jarjarM »

Why not diversify and have some $$$ in index and some in active management with certain tilt that matches your belief in the inefficiency of the market.
alex_686
Posts: 13286
Joined: Mon Feb 09, 2015 1:39 pm

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by alex_686 »

Jack&Warren disciple wrote: Thu Oct 21, 2021 5:44 pm "Mr. Wigglesworth also considers the possibility that the indexing movement could have some harmful effects on the economy and distort markets, by having money invested in specific companies because of their inclusion in an index rather than because of their individual prospects."

While I haven't personally seen much to be critical about after index investing for decades, does Mr. Wigglesworth seem to have a legitimate beef, and if so, wouldn't stock picking fund managers be able to outperform the index fund investor? But will the stock picking fund manager be able to consistently outperform the market index investor to compensate for higher fees?
Yes and No. I think you are misreading the argument.

Active managers go out into the market and buy and sell stocks based on what they think the company is worth. This is hard, expensive, and risky work. But it does generate a positive outcome for society. Correct stock prices, which leads to correct allocation of capital.

Passive investors are free ridding on the active manager's work. The reason why stock and bond indexes return good returns is because prices are correct. It is darn right unpatriotic to sit on the sidelines and reap the rewards of red-blooded competitive men doing real battle.

Or at least that is the argument.

There are seeds to truth. The reason why passive investing works is because the market is efficient. It is efficient because of active managers, hedge funds, etc. You can compare different similar markets across time and space and see this. You do people with skin in the game setting prices.

On the other hand it makes no sense for the average uniformed investor to either pick a stock or a fund manager. They have no skill. The results range from average dart throwing to something worse.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Topic Author
Jack&Warren disciple
Posts: 120
Joined: Sat Sep 11, 2021 9:46 am

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by Jack&Warren disciple »

jarjarM wrote: Thu Oct 21, 2021 5:57 pm Why not diversify and have some $$$ in index and some in active management with certain tilt that matches your belief in the inefficiency of the market.
I guess I do to some extent, I allow myself 10% of my portfolio mix as play money for purely speculative stocks, knowing if I lose it all that it won't have any impact on my lifestyle. I'm pretty sure Warren Buffett agrees that that type of approach is okay and life is more fun that way.
jarjarM
Posts: 2502
Joined: Mon Jul 16, 2018 1:21 pm

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by jarjarM »

Jack&Warren disciple wrote: Thu Oct 21, 2021 6:42 pm ...life is more fun that way.
Totally agree :beer
Topic Author
Jack&Warren disciple
Posts: 120
Joined: Sat Sep 11, 2021 9:46 am

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by Jack&Warren disciple »

alex_686 wrote: Thu Oct 21, 2021 6:38 pm
Jack&Warren disciple wrote: Thu Oct 21, 2021 5:44 pm "Mr. Wigglesworth also considers the possibility that the indexing movement could have some harmful effects on the economy and distort markets, by having money invested in specific companies because of their inclusion in an index rather than because of their individual prospects."

While I haven't personally seen much to be critical about after index investing for decades, does Mr. Wigglesworth seem to have a legitimate beef, and if so, wouldn't stock picking fund managers be able to outperform the index fund investor? But will the stock picking fund manager be able to consistently outperform the market index investor to compensate for higher fees?
Yes and No. I think you are misreading the argument.

Active managers go out into the market and buy and sell stocks based on what they think the company is worth. This is hard, expensive, and risky work. But it does generate a positive outcome for society. Correct stock prices, which leads to correct allocation of capital.

Passive investors are free ridding on the active manager's work. The reason why stock and bond indexes return good returns is because prices are correct. It is darn right unpatriotic to sit on the sidelines and reap the rewards of red-blooded competitive men doing real battle.

Or at least that is the argument.

There are seeds to truth. The reason why passive investing works is because the market is efficient. It is efficient because of active managers, hedge funds, etc. You can compare different similar markets across time and space and see this. You do people with skin in the game setting prices.

On the other hand it makes no sense for the average uniformed investor to either pick a stock or a fund manager. They have no skill. The results range from average dart throwing to something worse.
Great points. Liked this one the best: "Active managers go out into the market and buy and sell stocks based on what they think the company is worth. This is hard, expensive, and risky work. But it does generate a positive outcome for society.". With my 'play money', I am currently betting on some stocks that Bill Ackman and other well heeled hedge fund/portfolio managers are betting on that requires quite a bit of legal actions and they have the deep pockets to keep with the long expensive legal battles. Would a passive index investor reap their rewards, no, not until they are largely free of the litigation risks and other risks and end up in an index!

So maybe the moral of the story IS THAT ACTIVE FUND MANAGERS ARE NECESSARY FOR PROPERLY FUNCTIONING CAPITALISM.
User avatar
arcticpineapplecorp.
Posts: 15014
Joined: Tue Mar 06, 2012 8:22 pm

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by arcticpineapplecorp. »

I remember an interview with Jack where he said the people who created the ETF (eventually to sell to State Street after Vanguard rejected it, eventually starting their own ETF, known as "Vipers") the marketing pitch was something to the effect of: "A mutual fund that you can trade all day long just like a stock!" to which Jack said, "That sounds like a stupid thing to do". Here's something similar:
Part of the insistence is going in the wrong direction — and that is we have the ETF — which is a way of trading the index fund all day long in real time. What kind of a nut would do that?

source: https://www.fool.com/investing/general/ ... tions.aspx
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
Topic Author
Jack&Warren disciple
Posts: 120
Joined: Sat Sep 11, 2021 9:46 am

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by Jack&Warren disciple »

arcticpineapplecorp. wrote: Thu Oct 21, 2021 6:53 pm I remember an interview with Jack where he said the people who created the ETF (eventually to sell to State Street after Vanguard rejected it, eventually starting their own ETF, known as "Vipers") the marketing pitch was something to the effect of: "A mutual fund that you can trade all day long just like a stock!" to which Jack said, "That sounds like a stupid thing to do". Here's something similar:
Part of the insistence is going in the wrong direction — and that is we have the ETF — which is a way of trading the index fund all day long in real time. What kind of a nut would do that?

source: https://www.fool.com/investing/general/ ... tions.aspx
Still, Jack is rightfully a hero to many and it looks like he will rightly go down in the history of finance as the first one to provide index investing to retail investors! Although I just found out Magellan was not the first to sail around the globe, it was one of his last surviving crew members (Magellan died on an island half way around the world).
Thesaints
Posts: 5084
Joined: Tue Jun 20, 2017 12:25 am

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by Thesaints »

arcticpineapplecorp. wrote: Thu Oct 21, 2021 6:53 pm I remember an interview with Jack where he said the people who created the ETF (eventually to sell to State Street after Vanguard rejected it, eventually starting their own ETF, known as "Vipers") the marketing pitch was something to the effect of: "A mutual fund that you can trade all day long just like a stock!" to which Jack said, "That sounds like a stupid thing to do". Here's something similar:
Part of the insistence is going in the wrong direction — and that is we have the ETF — which is a way of trading the index fund all day long in real time. What kind of a nut would do that?

source: https://www.fool.com/investing/general/ ... tions.aspx
You need "trading all day long" in order to form the ETF price. But individual investors can buy and hold an ETF just like they do with a fund and get some tax advantages in the process.
TropikThunder
Posts: 3909
Joined: Sun Apr 03, 2016 5:41 pm

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by TropikThunder »

I’m confused what the OP is asking. Did Bogle “stumble” by declining ETF’s? Or did he “stumble” by making an index fund that (supposedly) messes up price discovery.
User avatar
markjk
Posts: 540
Joined: Wed Oct 07, 2020 6:01 am

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by markjk »

Jack&Warren disciple wrote: Thu Oct 21, 2021 5:44 pm "Mr. Wigglesworth also considers the possibility that the indexing movement could have some harmful effects on the economy and distort markets, by having money invested in specific companies because of their inclusion in an index rather than because of their individual prospects."

While I haven't personally seen much to be critical about after index investing for decades, does Mr. Wigglesworth seem to have a legitimate beef
It's an argument that has been floating around since indexing began. At what point does market pricing efficiency get overridden by indexing? It's really hard to say because the follow up question is "how much of the market needs to be actively traded to truly price the market?" I'm not smart enough to answer but as indexing continues to grow, it's certainly something to watch.
Jack&Warren disciple wrote: Thu Oct 21, 2021 5:44 pm "Mr. Wigglesworth also considers the possibility that the indexing movement could have some harmful effects on the economy and distort markets, by having money invested in specific companies because of their inclusion in an index rather than because of their individual prospects."

wouldn't stock picking fund managers be able to outperform the index fund investor? But will the stock picking fund manager be able to consistently outperform the market index investor to compensate for higher fees?
I think it depends on when/if a tipping point is hit on indexing such that individual stock picking can be done well and consistently over long periods of time. That is the thing with active management. It does work quite often for short stretches. Did anyone know who Cathy Woods was prior to last year? Managers do beat the market all the time for a few years here and there. Then they get smashed for a few years and when you take the the aggregate over time and add in the higher fees of active management (as you point out), they tend to lose out over time to indexing. Will anyone remember who Cathy Woods is 10 years from now? I doubt it.

The answer to this particular question is really decades away because we'll need to see it actually happen. It might, but for now it's a theory. But what the heck, I'll bite and give my answer. I'd bet as long as there is still some pricing going on in the market (e.g. not everyone in the world is indexing), indexing will still win out over time. But, who knows? It's fun to speculate and discuss for sure.

---

One more add-on comment. To me, the thing to watch moving forward is technology including high speed trading, AI algorithms, and the like. That stuff is changing the underlying market dynamics more than anything else in my opinion and just another reason to stay out of the individual trading game. It's hard enough to pick a winner (which requires a good entry and exit point) on a stock, bond, option, etc. It's even harder when you are competing against multi-million dollar AI driven robots on the other side of the trade. Today is way different than 1976. It often makes me wonder if some of our fundamental thinking about the stock market really is going to change. Technology, government policy, stock market participation (worldwide), shift in trading fees, low cost funds, and on and on. It's so different today. In other words, "This time it really is different." seems more feasible now than ever before but again, only time will tell.
User avatar
arcticpineapplecorp.
Posts: 15014
Joined: Tue Mar 06, 2012 8:22 pm

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by arcticpineapplecorp. »

Thesaints wrote: Fri Oct 22, 2021 2:09 am
arcticpineapplecorp. wrote: Thu Oct 21, 2021 6:53 pm I remember an interview with Jack where he said the people who created the ETF (eventually to sell to State Street after Vanguard rejected it, eventually starting their own ETF, known as "Vipers") the marketing pitch was something to the effect of: "A mutual fund that you can trade all day long just like a stock!" to which Jack said, "That sounds like a stupid thing to do". Here's something similar:
Part of the insistence is going in the wrong direction — and that is we have the ETF — which is a way of trading the index fund all day long in real time. What kind of a nut would do that?

source: https://www.fool.com/investing/general/ ... tions.aspx
You need "trading all day long" in order to form the ETF price. But individual investors can buy and hold an ETF just like they do with a fund and get some tax advantages in the process.
context matters. i don't think Jack would have rejected the product if ETFs were marketed in their initial days as buy and hold investments. We can't ask Jack now but I believe he was concerned not just with how they'd be used but how they'd be marketed to be used.

Also he was prescient in knowing eventually there would be sector and obscure ETFs as a natural extension of the initial market ETF introduction.

Finally, I'm not sure about this, but Jack would have been concerned with bid ask spreads. Unless it was known that ETFs would be as popular as they've become, he could have been concerned about an additional layer of fees (commissions) on top of the expense ratio. Yes, that commission is now low at least on market ETFs with great liquidity, but that wasn't a fait accompli.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
Topic Author
Jack&Warren disciple
Posts: 120
Joined: Sat Sep 11, 2021 9:46 am

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by Jack&Warren disciple »

TropikThunder wrote: Fri Oct 22, 2021 2:47 am I’m confused what the OP is asking. Did Bogle “stumble” by declining ETF’s? Or did he “stumble” by making an index fund that (supposedly) messes up price discovery.
Jack clearly thought there would be no interest in trading index funds intraday, yet today the VTI for example is traded quite a bit and I imagine it was a boom for its original creators. In other words, Jack could have gone one step further and embraced the ETF concept but originally I think he just left it as a mutual fund. So even the great creators of ideas in human history (here Jack in Finance) are completely human and subject to error, which is why I like index fund investing to begin with.
whereskyle
Posts: 1911
Joined: Wed Jan 29, 2020 9:29 am

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by whereskyle »

jarjarM wrote: Thu Oct 21, 2021 5:57 pm Why not diversify and have some $$$ in index and some in active management with certain tilt that matches your belief in the inefficiency of the market.
People overstate their abilities to actually implement and stick with plans like this. Once one complicates one's portfolio, one is almost certain to further complicate it in the future, making poor timing decisions, and eroding returns.
"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
edgeagg
Posts: 442
Joined: Tue Jan 23, 2018 12:27 pm
Location: WA-US

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by edgeagg »

jarjarM wrote: Thu Oct 21, 2021 5:57 pm Why not diversify and have some $$$ in index and some in active management with certain tilt that matches your belief in the inefficiency of the market.
.. and how do you 1) Define market inefficiency? 2) Measure this inefficiency 3) If measurable, convert this into an allocation? I am somewhat familiar with purported measures such as AMIM or variance ratios but would have no idea on how you'd do 3).

Also, I don't understand the OPs question: Why is what Jack said "obviously wrong"? Has buy and hold now been discredited and nobody told me? :shock:
Topic Author
Jack&Warren disciple
Posts: 120
Joined: Sat Sep 11, 2021 9:46 am

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by Jack&Warren disciple »

edgeagg wrote: Fri Oct 22, 2021 8:45 am
jarjarM wrote: Thu Oct 21, 2021 5:57 pm Why not diversify and have some $$$ in index and some in active management with certain tilt that matches your belief in the inefficiency of the market.
.. and how do you 1) Define market inefficiency? 2) Measure this inefficiency 3) If measurable, convert this into an allocation? I am somewhat familiar with purported measures such as AMIM or variance ratios but would have no idea on how you'd do 3).

Also, I don't understand the OPs question: Why is what Jack said "obviously wrong"? Has buy and hold now been discredited and nobody told me? :shock:
Buying and holding an index fund over long time periods has worked well for me, I am just merely pointing out that Jack was so focused on the long term that originally he didn't seem to see the potential demand for intra day trading of the index, and as a financial product etf indexing seems popular doesn't it?

I'm sure Jack did quite well financially by originally offering the retail investor index MUTUAL FUNDS, he seems to have missed the boat in embracing the idea of index etfs.

Bill Gates and Microsoft dropped the ball by not seeing the importance of creating an operating system for smart phones early on and Google with Android and Apple now have a seemingly insurmountable lead in smart phones.
FactualFran
Posts: 2750
Joined: Sat Feb 21, 2015 1:29 pm

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by FactualFran »

Jack&Warren disciple wrote: Fri Oct 22, 2021 8:57 am Buying and holding an index fund over long time periods has worked well for me, I am just merely pointing out that Jack was so focused on the long term that originally he didn't seem to see the potential demand for intra day trading of the index, and as a financial product etf indexing seems popular doesn't it?
Jack likely saw the potential demand for intra day trading but considered trading to not be appropriate for individual investors, who should think long term. A quote that arcticpineapplecorp. included in a post is worth repeating.
Part of the insistence is going in the wrong direction — and that is we have the ETF — which is a way of trading the index fund all day long in real time. What kind of a nut would do that?

source: https://www.fool.com/investing/general/ ... tions.aspx
User avatar
bertilak
Posts: 10711
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by bertilak »

alex_686 wrote: Thu Oct 21, 2021 6:38 pm
Jack&Warren disciple wrote: Thu Oct 21, 2021 5:44 pm "Mr. Wigglesworth also considers the possibility that the indexing movement could have some harmful effects on the economy and distort markets, by having money invested in specific companies because of their inclusion in an index rather than because of their individual prospects."

While I haven't personally seen much to be critical about after index investing for decades, does Mr. Wigglesworth seem to have a legitimate beef, and if so, wouldn't stock picking fund managers be able to outperform the index fund investor? But will the stock picking fund manager be able to consistently outperform the market index investor to compensate for higher fees?
Yes and No. I think you are misreading the argument.

Active managers go out into the market and buy and sell stocks based on what they think the company is worth. This is hard, expensive, and risky work. But it does generate a positive outcome for society. Correct stock prices, which leads to correct allocation of capital.

Passive investors are free ridding on the active manager's work. The reason why stock and bond indexes return good returns is because prices are correct. It is darn right unpatriotic to sit on the sidelines and reap the rewards of red-blooded competitive men doing real battle.

Or at least that is the argument.

There are seeds to truth. The reason why passive investing works is because the market is efficient. It is efficient because of active managers, hedge funds, etc. You can compare different similar markets across time and space and see this. You do people with skin in the game setting prices.

On the other hand it makes no sense for the average uniformed investor to either pick a stock or a fund manager. They have no skill. The results range from average dart throwing to something worse.
My point of view, expressed as questions:
  1. Who placed the responsibility on the average citizen to assist in establishing market prices?
  2. Should the average citizen pay the price for taking on that responsibility?
  3. Does the average citizen have the skill to fulfill that responsibility?
  4. Does the average citizen have the resources to fulfill that responsibility?
  5. Would the average citizen do more harm than good by applying his ineptitude to the task?
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
investnoob
Posts: 481
Joined: Fri Oct 16, 2009 7:57 am
Location: Ottawa
Contact:

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by investnoob »

The article you quote in the OP does a disservice, I think, to what Wigglesworth actually does when he "considers" the idea that passive investments can hurt the economy.

I believe he actually rejects the idea in his book. And to that extent he "considers" it by doing a pros and cons analysis. Haven't read the book, but did read an interview of his where he "considers" it.
Thesaints
Posts: 5084
Joined: Tue Jun 20, 2017 12:25 am

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by Thesaints »

I really don't see any difference between a mutual fund and an ETF.

I also don't see any difference between a screwdriver and a knife, when I have to take care of a loose screw. It is not the knife's fault if someone pulls it out of the drawer to tighten a screw and ends up stabbing his mother-in-law.
Fallible
Posts: 8795
Joined: Fri Nov 27, 2009 3:44 pm

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by Fallible »

arcticpineapplecorp. wrote: Thu Oct 21, 2021 6:53 pm I remember an interview with Jack where he said the people who created the ETF (eventually to sell to State Street after Vanguard rejected it, eventually starting their own ETF, known as "Vipers") the marketing pitch was something to the effect of: "A mutual fund that you can trade all day long just like a stock!" to which Jack said, "That sounds like a stupid thing to do". Here's something similar:
Part of the insistence is going in the wrong direction — and that is we have the ETF — which is a way of trading the index fund all day long in real time. What kind of a nut would do that?

source: https://www.fool.com/investing/general/ ... tions.aspx
This is a great interview, good questions by Gardner and replies by Bogle explaining clearly his concern about ETFs. Another place to learn Bogle's exact thoughts on ETFs is his book, Stay the Course, the ETF chapter. Jack understood human nature leading to speculating, the temptation to trade where doing something is easier than achieving the patience and discipline to just stand there, and our tendency to think we are better than average.
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
secondopinion
Posts: 6008
Joined: Wed Dec 02, 2020 12:18 pm

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by secondopinion »

alex_686 wrote: Thu Oct 21, 2021 6:38 pm
Jack&Warren disciple wrote: Thu Oct 21, 2021 5:44 pm "Mr. Wigglesworth also considers the possibility that the indexing movement could have some harmful effects on the economy and distort markets, by having money invested in specific companies because of their inclusion in an index rather than because of their individual prospects."

While I haven't personally seen much to be critical about after index investing for decades, does Mr. Wigglesworth seem to have a legitimate beef, and if so, wouldn't stock picking fund managers be able to outperform the index fund investor? But will the stock picking fund manager be able to consistently outperform the market index investor to compensate for higher fees?
Yes and No. I think you are misreading the argument.

Active managers go out into the market and buy and sell stocks based on what they think the company is worth. This is hard, expensive, and risky work. But it does generate a positive outcome for society. Correct stock prices, which leads to correct allocation of capital.

Passive investors are free ridding on the active manager's work. The reason why stock and bond indexes return good returns is because prices are correct. It is darn right unpatriotic to sit on the sidelines and reap the rewards of red-blooded competitive men doing real battle.

Or at least that is the argument.

There are seeds to truth. The reason why passive investing works is because the market is efficient. It is efficient because of active managers, hedge funds, etc. You can compare different similar markets across time and space and see this. You do people with skin in the game setting prices.

On the other hand it makes no sense for the average uniformed investor to either pick a stock or a fund manager. They have no skill. The results range from average dart throwing to something worse.
Yes, as long as there is enough people who will do active selection of stocks, most of the "dilemma" is avoided.

My view on this is generally not accepted here; this post is probably one of those to invoke wrath.

People with reasonable assessment skills can properly make a skew on their portfolio based on their risk profile by selecting individual stocks. Expected returns may not be greater (and almost certainly not median returns), but the skew is what the objective is. I do not think selecting individual stocks is the best thing for the unskilled, of course, because they are often ill-suited to take that skew or know what skew they even want. Even the dart thrower can achieve skew, but I doubt they end up with the exact skew they need.

In short, most people do not know what they want and a passive fund is the smart choice. Those with opinions on managers can take active funds (and accept the skew the manager thinks is best). Those who exactly know what they want can include individual stocks up to what gives them the skew they want. Responsible investing keeps one from going broke with singleton stocks; the riskier it is the less one can invest (since near or completely 0 is extremely unlikely to be recoverable). Again, skew is the reason.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
Topic Author
Jack&Warren disciple
Posts: 120
Joined: Sat Sep 11, 2021 9:46 am

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by Jack&Warren disciple »

secondopinion wrote: Fri Oct 22, 2021 1:18 pm
alex_686 wrote: Thu Oct 21, 2021 6:38 pm
Jack&Warren disciple wrote: Thu Oct 21, 2021 5:44 pm "Mr. Wigglesworth also considers the possibility that the indexing movement could have some harmful effects on the economy and distort markets, by having money invested in specific companies because of their inclusion in an index rather than because of their individual prospects."

While I haven't personally seen much to be critical about after index investing for decades, does Mr. Wigglesworth seem to have a legitimate beef, and if so, wouldn't stock picking fund managers be able to outperform the index fund investor? But will the stock picking fund manager be able to consistently outperform the market index investor to compensate for higher fees?
Yes and No. I think you are misreading the argument.

Active managers go out into the market and buy and sell stocks based on what they think the company is worth. This is hard, expensive, and risky work. But it does generate a positive outcome for society. Correct stock prices, which leads to correct allocation of capital.

Passive investors are free ridding on the active manager's work. The reason why stock and bond indexes return good returns is because prices are correct. It is darn right unpatriotic to sit on the sidelines and reap the rewards of red-blooded competitive men doing real battle.

Or at least that is the argument.

There are seeds to truth. The reason why passive investing works is because the market is efficient. It is efficient because of active managers, hedge funds, etc. You can compare different similar markets across time and space and see this. You do people with skin in the game setting prices.

On the other hand it makes no sense for the average uniformed investor to either pick a stock or a fund manager. They have no skill. The results range from average dart throwing to something worse.
Yes, as long as there is enough people who will do active selection of stocks, most of the "dilemma" is avoided.

My view on this is generally not accepted here; this post is probably one of those to invoke wrath.

People with reasonable assessment skills can properly make a skew on their portfolio based on their risk profile by selecting individual stocks. Expected returns may not be greater (and almost certainly not median returns), but the skew is what the objective is. I do not think selecting individual stocks is the best thing for the unskilled, of course, because they are often ill-suited to take that skew or know what skew they even want. Even the dart thrower can achieve skew, but I doubt they end up with the exact skew they need.

In short, most people do not know what they want and a passive fund is the smart choice. Those with opinions on managers can take active funds (and accept the skew the manager thinks is best). Those who exactly know what they want can include individual stocks up to what gives them the skew they want. Responsible investing keeps one from going broke with singleton stocks; the riskier it is the less one can invest (since near or completely 0 is extremely unlikely to be recoverable). Again, skew is the reason.
https://www.cnbc.com/amp/2021/10/21/as- ... exing.html

"It may seem like a stock picker's market, but long-term data still backs the buy-and-hold crowd.

A majority of active managers failed to beat their passive benchmarks in the last year and only 11% of large-cap fund managers outperformed over a 10-year period, Morningstar said in a report last week."

"Bob Pisani: Beginning in the 1970s, index funds started changing the investment world, and then in the 1990s the birth of ETFs further accelerated the indexing revolution. Can you summarize for the viewers why indexing and passive investing has slowly been conquering the investing world?

Robin Wigglesworth: Two things, really: cost and performance. I think everybody knows about the cost side, that index funds, essentially broad, plain-vanilla, market cap-based index funds are a lot cheaper. You can essentially buy broad U.S. stock market exposure for four basis points now, even for free at some brokerages. And then it's just the performance side, which I think a lot of people still don't really realize, that in the long run, the index beats the vast majority of professional money managers across virtually every major asset class. In areas like equities, we're talking 90%, but still, in fixed income and high yield, most fund managers still can't beat the index in a 15-year performance period."

"Pisani: The evidence that active managers are pretty poor stock pickers really goes back into the 1930s with the Cowles Commission here, but the evidence really started mounting up in the 1970s and the 1980s. And yet active stock picking is still popular as ever. How do you explain that anomaly despite the evidence?

Wigglesworth: Hope springs eternal. I mean, it's kind of in our nature that nobody wants to settle for mediocrity, really. This was one of the most potent attack lines of people in the '70s and '80s when indexing first started to set roots, that who wants to be operated on by a mediocre surgeon? Who wants a mediocre lawyer? You want the best, right? And you want to be the best. So this wasn't just seen as lazy and passive, it was kind of seen as giving up. I think for a lot of people, it's still this boring thing. It's not exciting to say you're invested in a low-cost, well-diversified Vanguard index fund. That's not the kind of thing you roll out at parties and you're the coolest person there. No, you want to talk about the individual stocks you've picked, the derivatives you're trading, the fund manager that's managing your family's money. That's the kind of stuff that's cool. And that's, sadly, human nature."

Wigglesworth: "And I think the crucial thing is that a lot of investors actually do worse than the markets not just because they try and pick hot stocks or hot fund managers, it's because they typically bail when something goes wrong or they jump on momentum. So actually, the problem with smart beta is that it can be really hard to hold through those long, painful drawdown periods, which is why, although I am convinced by the weight of the evidence that it does work, I think in practice it's really hard for investors to capture that because the discipline needed is almost superhuman at times. I mean, think of value investors. The past decade has been awful, right?"

"...market timing is essentially a fool's errand."

" I think, though, in practice, I am extremely unconvinced by arguments that the market's efficiency is being eroded by the growth of passive, mostly because, frankly, a lot of active managers throughout history were in practice closet indexers, they just charged money as if they were trading actively but generally hugged the index anyway. I think there are more mutual fund managers than ever before. There are more day traders than ever before. There are still more hedge fund managers in the U.S. than there are Taco Bell managers."

"If you look at the overall equity universe, it becomes a little bit different. So I've tallied up the international and the U.S. and the global numbers on index funds and ETFs, and broadly speaking, there's around [$]17 trillion in index funds, formal index funds."
secondopinion
Posts: 6008
Joined: Wed Dec 02, 2020 12:18 pm

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by secondopinion »

Jack&Warren disciple wrote: Fri Oct 22, 2021 3:04 pm
secondopinion wrote: Fri Oct 22, 2021 1:18 pm
alex_686 wrote: Thu Oct 21, 2021 6:38 pm
Jack&Warren disciple wrote: Thu Oct 21, 2021 5:44 pm "Mr. Wigglesworth also considers the possibility that the indexing movement could have some harmful effects on the economy and distort markets, by having money invested in specific companies because of their inclusion in an index rather than because of their individual prospects."

While I haven't personally seen much to be critical about after index investing for decades, does Mr. Wigglesworth seem to have a legitimate beef, and if so, wouldn't stock picking fund managers be able to outperform the index fund investor? But will the stock picking fund manager be able to consistently outperform the market index investor to compensate for higher fees?
Yes and No. I think you are misreading the argument.

Active managers go out into the market and buy and sell stocks based on what they think the company is worth. This is hard, expensive, and risky work. But it does generate a positive outcome for society. Correct stock prices, which leads to correct allocation of capital.

Passive investors are free ridding on the active manager's work. The reason why stock and bond indexes return good returns is because prices are correct. It is darn right unpatriotic to sit on the sidelines and reap the rewards of red-blooded competitive men doing real battle.

Or at least that is the argument.

There are seeds to truth. The reason why passive investing works is because the market is efficient. It is efficient because of active managers, hedge funds, etc. You can compare different similar markets across time and space and see this. You do people with skin in the game setting prices.

On the other hand it makes no sense for the average uniformed investor to either pick a stock or a fund manager. They have no skill. The results range from average dart throwing to something worse.
Yes, as long as there is enough people who will do active selection of stocks, most of the "dilemma" is avoided.

My view on this is generally not accepted here; this post is probably one of those to invoke wrath.

People with reasonable assessment skills can properly make a skew on their portfolio based on their risk profile by selecting individual stocks. Expected returns may not be greater (and almost certainly not median returns), but the skew is what the objective is. I do not think selecting individual stocks is the best thing for the unskilled, of course, because they are often ill-suited to take that skew or know what skew they even want. Even the dart thrower can achieve skew, but I doubt they end up with the exact skew they need.

In short, most people do not know what they want and a passive fund is the smart choice. Those with opinions on managers can take active funds (and accept the skew the manager thinks is best). Those who exactly know what they want can include individual stocks up to what gives them the skew they want. Responsible investing keeps one from going broke with singleton stocks; the riskier it is the less one can invest (since near or completely 0 is extremely unlikely to be recoverable). Again, skew is the reason.
https://www.cnbc.com/amp/2021/10/21/as- ... exing.html

"It may seem like a stock picker's market, but long-term data still backs the buy-and-hold crowd.

A majority of active managers failed to beat their passive benchmarks in the last year and only 11% of large-cap fund managers outperformed over a 10-year period, Morningstar said in a report last week."

"Bob Pisani: Beginning in the 1970s, index funds started changing the investment world, and then in the 1990s the birth of ETFs further accelerated the indexing revolution. Can you summarize for the viewers why indexing and passive investing has slowly been conquering the investing world?

Robin Wigglesworth: Two things, really: cost and performance. I think everybody knows about the cost side, that index funds, essentially broad, plain-vanilla, market cap-based index funds are a lot cheaper. You can essentially buy broad U.S. stock market exposure for four basis points now, even for free at some brokerages. And then it's just the performance side, which I think a lot of people still don't really realize, that in the long run, the index beats the vast majority of professional money managers across virtually every major asset class. In areas like equities, we're talking 90%, but still, in fixed income and high yield, most fund managers still can't beat the index in a 15-year performance period."

"Pisani: The evidence that active managers are pretty poor stock pickers really goes back into the 1930s with the Cowles Commission here, but the evidence really started mounting up in the 1970s and the 1980s. And yet active stock picking is still popular as ever. How do you explain that anomaly despite the evidence?

Wigglesworth: Hope springs eternal. I mean, it's kind of in our nature that nobody wants to settle for mediocrity, really. This was one of the most potent attack lines of people in the '70s and '80s when indexing first started to set roots, that who wants to be operated on by a mediocre surgeon? Who wants a mediocre lawyer? You want the best, right? And you want to be the best. So this wasn't just seen as lazy and passive, it was kind of seen as giving up. I think for a lot of people, it's still this boring thing. It's not exciting to say you're invested in a low-cost, well-diversified Vanguard index fund. That's not the kind of thing you roll out at parties and you're the coolest person there. No, you want to talk about the individual stocks you've picked, the derivatives you're trading, the fund manager that's managing your family's money. That's the kind of stuff that's cool. And that's, sadly, human nature."

Wigglesworth: "And I think the crucial thing is that a lot of investors actually do worse than the markets not just because they try and pick hot stocks or hot fund managers, it's because they typically bail when something goes wrong or they jump on momentum. So actually, the problem with smart beta is that it can be really hard to hold through those long, painful drawdown periods, which is why, although I am convinced by the weight of the evidence that it does work, I think in practice it's really hard for investors to capture that because the discipline needed is almost superhuman at times. I mean, think of value investors. The past decade has been awful, right?"

"...market timing is essentially a fool's errand."

" I think, though, in practice, I am extremely unconvinced by arguments that the market's efficiency is being eroded by the growth of passive, mostly because, frankly, a lot of active managers throughout history were in practice closet indexers, they just charged money as if they were trading actively but generally hugged the index anyway. I think there are more mutual fund managers than ever before. There are more day traders than ever before. There are still more hedge fund managers in the U.S. than there are Taco Bell managers."

"If you look at the overall equity universe, it becomes a little bit different. So I've tallied up the international and the U.S. and the global numbers on index funds and ETFs, and broadly speaking, there's around [$]17 trillion in index funds, formal index funds."
To the first bolded, percentiles are all that is given against positive skew; percentiles will make positive skew look bad every time. That is why positive skew exists in the first place: the median is often lower than the mean. Even after prolonged periods, high positive skews will show lower median performance than an index fund. Also, remember that fees are being collected as well from these active managers (shoving the percentages even worse). However, the reward for the likely underperformance is the possible major outperformance. If one is not understanding this principle of skew and percentiles (and the impact of fees), they will not really understand what they read about passive funds (whether for or against).

To the second, taking a skew because of social reasons is flat out silly. As I said, most people do not even know if taking that positive skew is optimal or advisable; and they would not even know when it was probability and not skill that made them money. It is business, not pleasure; there is no room for emotions here. Just optimal decisions to the objectives drives deviations from the suggestions make blankly by so many sources.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
edgeagg
Posts: 442
Joined: Tue Jan 23, 2018 12:27 pm
Location: WA-US

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by edgeagg »

Jack&Warren disciple wrote: Fri Oct 22, 2021 8:57 am
edgeagg wrote: Fri Oct 22, 2021 8:45 am
jarjarM wrote: Thu Oct 21, 2021 5:57 pm Why not diversify and have some $$$ in index and some in active management with certain tilt that matches your belief in the inefficiency of the market.
.. and how do you 1) Define market inefficiency? 2) Measure this inefficiency 3) If measurable, convert this into an allocation? I am somewhat familiar with purported measures such as AMIM or variance ratios but would have no idea on how you'd do 3).

Also, I don't understand the OPs question: Why is what Jack said "obviously wrong"? Has buy and hold now been discredited and nobody told me? :shock:
Buying and holding an index fund over long time periods has worked well for me, I am just merely pointing out that Jack was so focused on the long term that originally he didn't seem to see the potential demand for intra day trading of the index, and as a financial product etf indexing seems popular doesn't it?
...

Bill Gates and Microsoft dropped the ball by not seeing the importance of creating an operating system for smart phones early on and Google with Android and Apple now have a seemingly insurmountable lead in smart phones.
Respectfully disagree:

1) Does a retail investor have the chops to buy and sell the etf repeatedly to make it worth the while even with small bid-ask spreads? I'd love to see evidence of that happening in the real world. If there truly was evidence for this, we would all be holding SPDR.
2) As much as I'd like to believe the Billg analogy (being an early android os dev), it just isn't a valid comparison for the S&P500 vs SPDR. MSFTs OS was laughable and the UX was one that only SteveB could love. There is simply no comparison between the two and S&P500 index vs SPDR for the retail investor. See comment (1) above.
edgeagg
Posts: 442
Joined: Tue Jan 23, 2018 12:27 pm
Location: WA-US

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by edgeagg »

Thesaints wrote: Fri Oct 22, 2021 12:18 pm I really don't see any difference between a mutual fund and an ETF.

I also don't see any difference between a screwdriver and a knife, when I have to take care of a loose screw. It is not the knife's fault if someone pulls it out of the drawer to tighten a screw and ends up stabbing his mother-in-law.
:) :) :) . Bloodthirsty but accurate. Thank you for the giggle to start out a weekend!
Patzer
Posts: 701
Joined: Wed Jun 10, 2015 10:56 am

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by Patzer »

alex_686 wrote: Thu Oct 21, 2021 6:38 pm
Jack&Warren disciple wrote: Thu Oct 21, 2021 5:44 pm "Mr. Wigglesworth also considers the possibility that the indexing movement could have some harmful effects on the economy and distort markets, by having money invested in specific companies because of their inclusion in an index rather than because of their individual prospects."

While I haven't personally seen much to be critical about after index investing for decades, does Mr. Wigglesworth seem to have a legitimate beef, and if so, wouldn't stock picking fund managers be able to outperform the index fund investor? But will the stock picking fund manager be able to consistently outperform the market index investor to compensate for higher fees?
Yes and No. I think you are misreading the argument.

Active managers go out into the market and buy and sell stocks based on what they think the company is worth. This is hard, expensive, and risky work. But it does generate a positive outcome for society. Correct stock prices, which leads to correct allocation of capital.

Passive investors are free ridding on the active manager's work. The reason why stock and bond indexes return good returns is because prices are correct. It is darn right unpatriotic to sit on the sidelines and reap the rewards of red-blooded competitive men doing real battle.

Or at least that is the argument.

There are seeds to truth. The reason why passive investing works is because the market is efficient. It is efficient because of active managers, hedge funds, etc. You can compare different similar markets across time and space and see this. You do people with skin in the game setting prices.

On the other hand it makes no sense for the average uniformed investor to either pick a stock or a fund manager. They have no skill. The results range from average dart throwing to something worse.
I believe that the market would not work if it was 100% passive, but we are nowhere near that and we never will be, because people will always want to do better than average, so there is no reason to fret.
I am roughly 94% passive, 6% active. I enjoy stock picking, so I have 1 account that I allow myself to do it in, and that account helps me ignore the other 94% of my portfolio and just let it ride in indexes. :)
pkcrafter
Posts: 15461
Joined: Sun Mar 04, 2007 11:19 am
Location: CA
Contact:

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by pkcrafter »

Fallible wrote: Fri Oct 22, 2021 12:47 pm
arcticpineapplecorp. wrote: Thu Oct 21, 2021 6:53 pm I remember an interview with Jack where he said the people who created the ETF (eventually to sell to State Street after Vanguard rejected it, eventually starting their own ETF, known as "Vipers") the marketing pitch was something to the effect of: "A mutual fund that you can trade all day long just like a stock!" to which Jack said, "That sounds like a stupid thing to do". Here's something similar:
Part of the insistence is going in the wrong direction — and that is we have the ETF — which is a way of trading the index fund all day long in real time. What kind of a nut would do that?

source: https://www.fool.com/investing/general/ ... tions.aspx
This is a great interview, good questions by Gardner and replies by Bogle explaining clearly his concern about ETFs. Another place to learn Bogle's exact thoughts on ETFs is his book, Stay the Course, the ETF chapter. Jack understood human nature leading to speculating, the temptation to trade where doing something is easier than achieving the patience and discipline to just stand there, and our tendency to think we are better than average.
Right, +1 :thumbsup

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
User avatar
Taylor Larimore
Posts: 32839
Joined: Tue Feb 27, 2007 7:09 pm
Location: Miami FL

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by Taylor Larimore »

Bogleheads:

This is my favorite article on the subject (written by a Nobel Laurate):

The Arithmetic of Active Management

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "When you own the entire stock market through a broad stock index fund with an appropriate allocation to an all bond-market index fund, you have the optimal investment strategy."
"Simplicity is the master key to financial success." -- Jack Bogle
Topic Author
Jack&Warren disciple
Posts: 120
Joined: Sat Sep 11, 2021 9:46 am

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by Jack&Warren disciple »

Taylor Larimore wrote: Sat Oct 23, 2021 10:41 am Bogleheads:

This is my favorite article on the subject (written by a Nobel Laurate):

The Arithmetic of Active Management

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "When you own the entire stock market through a broad stock index fund with an appropriate allocation to an all bond-market index fund, you have the optimal investment strategy."
Nice concise article, does this mean I have been mooching off the fruits of the "active managers" for all these decades? Maybe they aren't the "evil hedge fund guys" after all ;-)!

"If "active" and "passive" management styles are defined in sensible ways, it must be the case that

(1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and

(2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar"
Topic Author
Jack&Warren disciple
Posts: 120
Joined: Sat Sep 11, 2021 9:46 am

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by Jack&Warren disciple »

Taylor Larimore wrote: Sat Oct 23, 2021 10:41 am Bogleheads:

This is my favorite article on the subject (written by a Nobel Laurate):

The Arithmetic of Active Management

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "When you own the entire stock market through a broad stock index fund with an appropriate allocation to an all bond-market index fund, you have the optimal investment strategy."
It just occurred to me that the "market average return" does NOT include venture capital and perhaps an argument could be made that adding some into your portfolio mix could be beneficial, as I recall this is what propelled some major college endowments to achieve record above market returns lately.
Thesaints
Posts: 5084
Joined: Tue Jun 20, 2017 12:25 am

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by Thesaints »

Jack&Warren disciple wrote: Sat Oct 23, 2021 12:57 pm
Taylor Larimore wrote: Sat Oct 23, 2021 10:41 am Bogleheads:

This is my favorite article on the subject (written by a Nobel Laurate):

The Arithmetic of Active Management

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "When you own the entire stock market through a broad stock index fund with an appropriate allocation to an all bond-market index fund, you have the optimal investment strategy."
It just occurred to me that the "market average return" does NOT include venture capital and perhaps an argument could be made that adding some into your portfolio mix could be beneficial, as I recall this is what propelled some major college endowments to achieve record above market returns lately.
Venture capital does not invest in the market.
alex_686
Posts: 13286
Joined: Mon Feb 09, 2015 1:39 pm

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by alex_686 »

Thesaints wrote: Sat Oct 23, 2021 2:29 pm Venture capital does not invest in the market.
Maybe. Define "market".

Everything that I have read on the theory and academic side suggests that "the market" would included VC.

Everything that I haver worked on from a practical side has excluded it.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
User avatar
nisiprius
Advisory Board
Posts: 52105
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by nisiprius »

Any data or guesstimates from anyone--but I'm thinking of alex_686--on what percentage of the dollars traded in ETFs is being done by participants who simply want to hold what's in the ETF basket, and what percentage is done by actors who are shorting, leveraging, or trading options on them?

Are they primarily "mutual funds with a finer time granularity" or are they primarily "building blocks for financial engineering?"
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Broken Man 1999
Posts: 8620
Joined: Wed Apr 08, 2015 11:31 am
Location: West coast of Florida, near Champa Bay !

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by Broken Man 1999 »

I think Mr Bogle erred by not accepting the gift of ETFs he was offered.

My belief is he made a decision with his heart, rather than his head.

My father always told us to do business with our heads, not our hearts.

Eh, so what. His contributions via index funds solidified his position in the industry.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go." - Mark Twain
Topic Author
Jack&Warren disciple
Posts: 120
Joined: Sat Sep 11, 2021 9:46 am

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by Jack&Warren disciple »

Broken Man 1999 wrote: Sat Oct 23, 2021 5:00 pm I think Mr Bogle erred by not accepting the gift of ETFs he was offered.

My belief is he made a decision with his heart, rather than his head.

My father always told us to do business with our heads, not our hearts.

Eh, so what. His contributions via index funds solidified his position in the industry.

Broken Man 1999
I think he will always be considered the "father" of index investing and an "evangelist" to the end, and he helped me quite a bit over the decades as a guiding hand...
alex_686
Posts: 13286
Joined: Mon Feb 09, 2015 1:39 pm

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by alex_686 »

nisiprius wrote: Sat Oct 23, 2021 4:52 pm Any data or guesstimates from anyone--but I'm thinking of alex_686--on what percentage of the dollars traded in ETFs is being done by participants who simply want to hold what's in the ETF basket, and what percentage is done by actors who are shorting, leveraging, or trading options on them?
I don't know of any studies directly on this issue. And I would be hard pressed to figure out how you would measure it. But I can give you 2 things to think about.

First, as I have said before I think ETFs will come to dominate over mutual funds. Primarily due to their lower cost structure. In particular their trading costs. When mutual fund shares are purchased or redeemed the portfolio manager's trading desk has to go out and trade. i.e., explicit and implicit costs. These costs are born by the shareholders. With a ETF it is the Authorized Participant (AP) who bears the cost. As a shareholder in a ETF you don't bear the cost of high turnover in the portfolio or in the shares traded in the secondary market.

As such the structure serves both the long term holders, the high frequency trades, and all of the time scales in-between very well.

Next, I have seen Vanguard papers saying that their retail investors hold ETFs for about the same holding period as mutual funds. So giving long term holders access to ETFs don't turn them into day-traders. I don't give much credence to the people selling the story that ETFs encourage bad behaviors. Just not something that I have seen.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
User avatar
Brianmcg321
Posts: 1874
Joined: Mon Jul 15, 2019 8:23 am

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by Brianmcg321 »

Jack&Warren disciple wrote: Fri Oct 22, 2021 7:43 am
TropikThunder wrote: Fri Oct 22, 2021 2:47 am I’m confused what the OP is asking. Did Bogle “stumble” by declining ETF’s? Or did he “stumble” by making an index fund that (supposedly) messes up price discovery.
Jack clearly thought there would be no interest in trading index funds intraday, yet today the VTI for example is traded quite a bit and I imagine it was a boom for its original creators. In other words, Jack could have gone one step further and embraced the ETF concept but originally I think he just left it as a mutual fund. So even the great creators of ideas in human history (here Jack in Finance) are completely human and subject to error, which is why I like index fund investing to begin with.
No, I think Jack just thought it was dumb. Just because you can do something doesn't mean you have to.

https://www.youtube.com/watch?v=zrCo0m5gSfc&t=94s
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.
Thesaints
Posts: 5084
Joined: Tue Jun 20, 2017 12:25 am

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by Thesaints »

alex_686 wrote: Sat Oct 23, 2021 4:34 pm
Thesaints wrote: Sat Oct 23, 2021 2:29 pm Venture capital does not invest in the market.
Maybe. Define "market".

Everything that I have read on the theory and academic side suggests that "the market" would included VC.

Everything that I haver worked on from a practical side has excluded it.
What does “the market” exclude, then ?
“Publicly traded companies” is an objective criterion. If we begin including startups, why not the grocery store around the corner, or my cousin’s interior decoration consulting business ?
TropikThunder
Posts: 3909
Joined: Sun Apr 03, 2016 5:41 pm

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by TropikThunder »

alex_686 wrote: Sat Oct 23, 2021 4:34 pm
Thesaints wrote: Sat Oct 23, 2021 2:29 pm Venture capital does not invest in the market.
Maybe. Define "market".

Everything that I have read on the theory and academic side suggests that "the market" would included VC.

Everything that I haver worked on from a practical side has excluded it.
In theory, theory and practice are the same. In practice, they are not.
:)
alex_686
Posts: 13286
Joined: Mon Feb 09, 2015 1:39 pm

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by alex_686 »

Thesaints wrote: Sat Oct 23, 2021 6:56 pm “Publicly traded companies” is an objective criterion. If we begin including startups, why not the grocery store around the corner, or my cousin’s interior decoration consulting business ?
A couple of points.

Why use "Publicly traded companies" as a definition? What is the purpose? What purpose are we trying to achieve with that particular measurement stick?

Are we excluding government debt but including thinly traded public companies? I have had some situations where private equity has been more liquid than publicly traded companies. What about companies that have ownership issues such as large blocks controlled by the government or founders? Include SPACs?

The way I have seen this defended is "all investable assets including real estate, commodities, precious metals, and arts & collectables". So yes, under this definition we would included the grocery store around the block. And there is some justification for this.

If we are trying to construct a index we can invest in a key component is investability. So liquidity. If we are doing academic studies we want high quality data. So public companies that trade on a exchange. Passive investing rests on the Efficient Market Hypothesis, so we want high quality information (public companies, government debt, etc.) traded publicly (price data, liquidity)

But just because a asset does not have these qualities does not mean it is not a investment. Direct real estate holdings are a good example. Where does investment rental properties fit in? Home ownership is the majority of people's investments. The asset allocation to these can have a huge impact.

And to extend, I know that assets have a impact on my public holdings. The rise of private equity has probably blunted the return in the small cap and value space.
Thesaints wrote: Sat Oct 23, 2021 2:29 pm It just occurred to me that the "market average return" does NOT include venture capital and perhaps an argument could be made that adding some into your portfolio mix could be beneficial, as I recall this is what propelled some major college endowments to achieve record above market returns lately.
Venture capital does not invest in the market.
[/quote]

Once again, what does that mean?

For myself VC is outside of my market. I don't have the required capital to hazard. I don't have the time or expertise. This is not true for everybody.

But lets us bring this back to the OP:
Jack&Warren disciple wrote: Thu Oct 21, 2021 5:44 pm "Mr. Wigglesworth also considers the possibility that the indexing movement could have some harmful effects on the economy and distort markets, by having money invested in specific companies because of their inclusion in an index rather than because of their individual prospects."

While I haven't personally seen much to be critical about after index investing for decades, does Mr. Wigglesworth seem to have a legitimate beef, and if so, wouldn't stock picking fund managers be able to outperform the index fund investor? But will the stock picking fund manager be able to consistently outperform the market index investor to compensate for higher fees?
There are large swaths of investments that are not well suited for VC, Private Equity, the grocery around the corner. These require
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
andypanda
Posts: 1992
Joined: Sun Nov 12, 2017 8:11 pm
Location: Richmond, Virginia

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by andypanda »

"Active managers go out into the market and buy and sell stocks based on what they think the company is worth."

That's the rumor. I suspect a great many of them are trying to get in early on a soon to be hot popular faddish stock or two or three and make a killing in order to make a name for themselves. Attracting investment money is a competitive business and big numbers appear to be important. In other words, they want to be famously successful, and not just average or above respectable plodders.
secondopinion
Posts: 6008
Joined: Wed Dec 02, 2020 12:18 pm

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by secondopinion »

andypanda wrote: Mon Oct 25, 2021 6:59 am "Active managers go out into the market and buy and sell stocks based on what they think the company is worth."

That's the rumor. I suspect a great many of them are trying to get in early on a soon to be hot popular faddish stock or two or three and make a killing in order to make a name for themselves. Attracting investment money is a competitive business and big numbers appear to be important. In other words, they want to be famously successful, and not just average or above respectable plodders.
They either take positive skew and hope they get lucky and tout the massive gains, or they take leveraged negative skew and show that they have beat the market for a long while. The former are less likely to achieve the name than the latter, but the news likes the former.

After fees, it is hard to back either of them in reality.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
Topic Author
Jack&Warren disciple
Posts: 120
Joined: Sat Sep 11, 2021 9:46 am

Re: Did Jack stumble?: "Why would anyone want to buy the S&P 500 at 10 o'clock in the morning and sell it at 2 o'clock i

Post by Jack&Warren disciple »

secondopinion wrote: Mon Oct 25, 2021 11:50 am
andypanda wrote: Mon Oct 25, 2021 6:59 am "Active managers go out into the market and buy and sell stocks based on what they think the company is worth."

That's the rumor. I suspect a great many of them are trying to get in early on a soon to be hot popular faddish stock or two or three and make a killing in order to make a name for themselves. Attracting investment money is a competitive business and big numbers appear to be important. In other words, they want to be famously successful, and not just average or above respectable plodders.
They either take positive skew and hope they get lucky and tout the massive gains, or they take leveraged negative skew and show that they have beat the market for a long while. The former are less likely to achieve the name than the latter, but the news likes the former.

After fees, it is hard to back either of them in reality.
The fees and overwhelming inability to consistently perform above average has kept me in index funds for decades and I'm staying the course with Jack and Warren's sound logic. I still have my 10% for play money if I ever want to try to outperform the market, because of course, I AM SO MUCH SMARTER THAN THE AVERAGE BEAR ;-)!
Post Reply