Wouldn't this make it easier for active managers to out-perform indexes locally? The comparable figure for American markets is 25%. The only advantage I see for passive funds locally is their lower fees relative to active funds. Source for image. I invest about 65% into local market as part of my equity portion of AA for tax reasons and finding out about this retail investors being majority of stock market volume locally is making me think active management locally is not a bad idea.
Retail Investors make up [largest group] of local market volume currently. Implications for local market efficiency.
Retail Investors make up [largest group] of local market volume currently. Implications for local market efficiency.
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Re: Retail Investors make up majority of local market volume currently. Implications for local market efficiency.
If you presume that "retail investors" means more suckers actively trading, having more of them does create an opportunity for traders with better information/positions.
The term "passive investing" excludes actively trading, people investing that way are buying an investment to own the investment, not with the expectation that they'll trade in-out of it better than the other guy... It's a different expectation of where you're returns are expected to come from.
The term "passive investing" excludes actively trading, people investing that way are buying an investment to own the investment, not with the expectation that they'll trade in-out of it better than the other guy... It's a different expectation of where you're returns are expected to come from.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Re: Retail Investors make up [largest group] of local market volume currently. Implications for local market efficiency.
On a minor administrative point, I have clarified the thread thread title. The term "majority" implies more than one half (50%) of a group. In this case, retail investors make up 44% of the market volume. It is the largest group of investors, but it is not a majority.
Re: Retail Investors make up [largest group] of local market volume currently. Implications for local market efficiency.
It is a plurality.
To the OP, sure, all you have to do to beat the market is be better than average by the amount of your fees. But it may be unwise to assume individuals are less competent than professional investors. In this case, before relying on that assumption, it would seem prudent to examine whether or not it applies to the market in question today. Studies of individual investor behavior and active management performance in pre-mutual-fund US market and modern Chinese market may not apply to modern Indian market.
To the OP, sure, all you have to do to beat the market is be better than average by the amount of your fees. But it may be unwise to assume individuals are less competent than professional investors. In this case, before relying on that assumption, it would seem prudent to examine whether or not it applies to the market in question today. Studies of individual investor behavior and active management performance in pre-mutual-fund US market and modern Chinese market may not apply to modern Indian market.
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Re: Retail Investors make up [largest group] of local market volume currently. Implications for local market efficiency.
Active management might be better beating ‘dumb money.’ But if you hire some one to actively manage your money, how do you know you are not dumb money to them collecting fees? If you actively trade, how do you know you are not the dumb money that Wall Street types (spending 100 plus hours a week and spending millions on research and execution of trades) considers the dumb money that they are making money off of?
When you play poker, if you personally cannot tell who the sucker is, guess who it is.
When you play poker, if you personally cannot tell who the sucker is, guess who it is.
G.E. Box "All models are wrong, but some are useful."
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Re: Retail Investors make up [largest group] of local market volume currently. Implications for local market efficiency.
Perhaps, but that may not be enough suckers. Bill Sharpe arithmetic still applies to your domestic market: in aggregate all investors in that market will get that market's return before subtracting each investor's costs. The market condition where I would expect professional investors to beat the market before management costs is a market where there are relatively few professional investors and the bulk of the trading volume is done by amateur investors. The graph suggests still less than half of trading volume is done by individuals---and that's if share of client participation is the same as trading volume. Is that enough to ensure that all the professionals will beat the market average? I don't know, but if pressed to guess, I would think probably not.
But even in a situation where one might expect most professional investors to prevail, I would still expect that (1) the professional investors would set their management fees high enough to capture the bulk of their consistent out performance and (2) that the lure of easy money would entice more and more competing professional investors, reducing over time the potential for consistent out performance. To my mind, points (1) and (2) suggest that even in a market with the potential for consistent professional investor out performance, it still makes good sense to index at low cost and guarantee yourself nearly the market performance without having to constantly monitor the situation to anticipate the deterioration of active management.
But even in a situation where one might expect most professional investors to prevail, I would still expect that (1) the professional investors would set their management fees high enough to capture the bulk of their consistent out performance and (2) that the lure of easy money would entice more and more competing professional investors, reducing over time the potential for consistent out performance. To my mind, points (1) and (2) suggest that even in a market with the potential for consistent professional investor out performance, it still makes good sense to index at low cost and guarantee yourself nearly the market performance without having to constantly monitor the situation to anticipate the deterioration of active management.
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Guy