Some of the math surrounding the derivation of the weakest forms of EMT also relies on the assumption that everyone has access to the same information, which is patently false in the world we live in. Even retail traders sometimes have an information edge (e.g. working at a biotech company or a specialized industry like semiconductors)
Now, the initial assumption could very well hit a wall.
Either both are or none are.
Holding an asset for N days does not magically flip it from category to the other.
Yes, if the market is overall rising, then active trading should enjoy that overall rise just like buy and hold does.
But then why active trade? Because you think you can do better than passive. That part - the "doing better" part - is zero sum. In fact it's negative sum, because of transaction costs.
then consider just how much shares passive funds move all the time due to continuous rebalancing they do due to their self-imposed mandate. (reminder: etfs hold ~$5T worth of assets.)
One of the big selling points of passive, market weighted ETFs is their low turnover and high tax efficiency. Vanguard’s S&P 500 ETF (VOO) has an annual turnover of 4%, for example. That’s nothing compared to the turnover in an actively traded portfolio.
Sure they do a lot of trading volume to account for inflows and outflows from the ETF. But one of the very nice properties of market weighting is that there is hardly any rebalancing needed as individual assets drift in price.
https://web.stanford.edu/~wfsharpe/art/active/active.htm
That doesn't mean there haven't been long-running active strategies that have worked. But those have overperformed by grabbing returns from other actives underperforming, not the passives.
Let me try to poke some holes in the argument.
1. Market return (M) is a weighted combination of passive (P) and actively managed portfolio (A) returns:
M = (1-w)P+(w)A.
2. Passive investor achieves market return M by holding the whole market, so P = M.
3. To satisfy the equation, A must also be M, regardless of w.
The logical error is in the assumption that P = M. To make this a concrete programming problem: let's say at time t=1, immediately prior to the start of a trading period, a passive investor decides to construct a portfolio. The passive investor makes investment allocations based on the current set of market prices.
Subsequently, how can the passive investor possibly match market returns without w being 0, or the passive investor knowing exactly how the active investors will allocate their holdings? That information lies in the future - one only needs to go though the exercise of simulating market returns on a discrete time basis to realize that the passive investor cannot possibly allocate to achieve exactly market returns.
M[1] = (1-w[1])P[1]+w[1]A[1]
Because all he has to do is do absolutely nothing and he achieves that. The passive investor doesn't make choices, he buys a portfolio that has all the components of the index in the proportions at that point. Then the active traders trade among themselves and the prices move. And now the passive investor still holds all the components in the index at the proportions at t=2 because he hasn't traded, only the assets have changed value. You can observe this in practice. Index funds track their index incredibly well.
If passive investors make worse trades with outsiders than the active investors do, they will underperfom.
You are assuming that the stock market is as-good-as-random, and that you can't crowdsource aggregate market sentiment and private information (someone who knows that they will buy the next 5 Tesla cars, so they will contribute to the growth). If you have a 100 of those private information owners, and you aggregate it, you just encoded for brand loyalty. People betting on the GameStop play did so, in part because they were made aware that they were not the only one with nostalgia and hope for GameStop. They did this by pooling their private information.
Finally, if you do assume that clueless pickers are the same as a coinflip, then their noise should cancel out, leading to a very uncertain prediction of 50% (so you turned their non-knowledge into valuable information about the variance/confidence/mindshare penetration/information availability), and then the real experts votes will balance the vote in favor of the most likely prediction (you distilled their expertise).
Taken my counter-example to your spoiler to the extreme: Imagine if all Redditor stock traders gave their honest best guess on if a stock would be down or up next month. The market would become very predictable with that information. Crowdsourcing a subset, just lowers this predictability (but never down to the level of a coin-flip). This crowdsourcing for predictability is precisely the reason the bigger, profitable hedgefunds are crawling Reddit, viewing 16-year old Crypto coin pickers on Youtube, and analyzing retail trades on RobinHood.
Source? If by "random" you mean "randomly pick a company off the stock exchange using a uniform distribution and then buy/sell based on the result of a coin flip", you might be right. However, if your "random" means "randomly picking stocks on a market-cap weighted basis and then holding" (ie. passive investing), I'm going to doubt your claim.
>You are assuming that the stock market is as-good-as-random, and that you can't crowdsource aggregate market sentiment and private information
The problem here is that all that information is public and the amount of alpha is scarce. What I mean by the latter is that if the crowd through its wisdom decides that GME should be $10 higher, and everyone starts buying up shares, it will reach its target price in no time. If the information is kept secret, you might be able to reap all the gains, but since it's public everyone else is trampling over each other trying to get a piece of the action, diluting or even eliminating the benefit for everyone.
>Finally, if you do assume that clueless pickers are the same as a coinflip, then their noise should cancel out, leading to a very uncertain prediction of 50% (so you turned their non-knowledge into valuable information about the variance/confidence/mindshare penetration/information availability), and then the real experts votes will balance the vote in favor of the most likely prediction (you distilled their expertise).
The canceling-out effect only works if they're clueless and are just flipping coins, but doesn't work if they're clueless and are all trying to buy into the same bubble.
>Taken my counter-example to your spoiler to the extreme: Imagine if all Redditor stock traders gave their honest best guess on if a stock would be down or up next month
You do realize that the stock market is exactly that, right? A crowd-sourced prediction engine. Every participant makes their best guess at what the price should be. If they think the price is undervalued they buy shares, pushing the value up. If they think the price is overvalued they do the reverse. Through this mechanism the market collectively obtains the price of a company.
And I think it is enough to claim that the average of the recommendations was better than any individual stock picker.
> The problem here is that all that information is public and the amount of alpha is scarce.
Not insurmountable, no? I feel these objections are often busied by finance professors, after a student rudely assumes they wouldn't be teaching if they knew how to make money.
RenTech was doing speech recognition on foreign TV broadcasts in the 90s. Can't you think of similar features you could whip up in a 100 lines of Python and the YouTube API? Some very profitable companies hire very smart PhDs to that for them. Could you bootstrap this? Work harder? Extend to some new hip platform a well-paid quant has never heard of?
> trying to get a piece of the action, diluting or even eliminating the benefit for everyone.
So join in. You are aware of the action. It's not like we are doing this for a bit of fun. The crowd wisdom is there, the hedge funds don't have a monopoly on polling it or analyzing it. Then redistribute the wealth for the benefit of everyone. Those very hard in on the action are not going to.
> but doesn't work if they're clueless and are all trying to buy into the same bubble.
Yes, this is correct, and a big problem in crowd analytics. Or at least, it has a big negative effect (you ideally want everyone to make decisions of their own accord, using their own information). But you can also again harnass this with counter trading strategies. Over the years, it has been fairly easy to call the top of a hype, and predict the obvious correction. So for instance, if the Teletubbies twitter is tweeting about Bitcoin, you know that maybe now is time to sell some Bitcoin, and rebuy back in 6 months when all newspapers are writing about how Bitcoin is a scam and a world-wide crypto ransom attack just occured.
The problem can be overcome in a couple of ways. An interesting one is: "skin-in-the-game". If your wrong hype predictions damages your reputation or causes money loss, you are more serious about it. Another is to ask: What percentage of other people do you think got this question wrong? People who answer Sydney as the capitol of Australia, think that few got it wrong. People who give the correct answer think that many will get it wrong.
> You do realize that the stock market is exactly that, right?
Partly yes. The difference with crowdsourcing is that you are building a model on top of the other participants. Many day traders with bots do not know that hedge funds have models more complex tracking what they are doing and going to do, than the bot is complex. But many day traders also underestimate how they'd stack up against an office of suits, if they worked together, and ramen-noodle hacked it.
uhh..
>The winning one did not manage to achieve results better than the baseline that was constructed as the maximum from ‘always buy’ and ‘always sell’ strategies over the testing period
Like I said, the benchmark isn't against a monkey randomly picking a stock, it's against a passive portfolio.
>Not insurmountable, no? [...] RenTech was doing speech recognition on foreign TV broadcasts in the 90s. Can't you think of similar features you could whip up in a 100 lines of Python and the YouTube API?
>So join in. You are aware of the action. [...]
That goes back to my remark about how alpha is limited. If you whipped up a script but was 10 minutes late to the party, then you'd get zero gains because someone has already beat you to the punch. The hard part isn't good data, it's getting good data that everyone else doesn't have.
>But you can also again harnass this with counter trading strategies. [...]
that almost sounds like "timing the market", which is generally known to not work for unsophisticated investors.
>The problem can be overcome in a couple of ways. An interesting one is: "skin-in-the-game". If your wrong hype predictions damages your reputation or causes money loss, you are more serious about it
The fact that they're publishing the trading strategies for anyone to use for free should tell you all you need to know about their "skin in the game". If they actually thought they had real alpha, they'd be harnessing it all for themselves, not publishing it on the internet and getting freeriders to dilute it.
>Another is to ask: What percentage of other people do you think got this question wrong? People who answer Sydney as the capitol of Australia, think that few got it wrong. People who give the correct answer think that many will get it wrong.
[insert joke about how economists have predicted 15 of the last 3 recessions]
>But many day traders also underestimate how they'd stack up against an office of suits, if they worked together, and ramen-noodle hacked it.
I don't doubt a bunch of random internet traders can outsmart an office of suits, I just doubt they can produce better returns (% wise) because their open planning (ie. posting their trades online for anyone to see) allows their alpha to be diluted and get front-runned.
At least we went from beating a fair coin with a crowd to benchmarking against a passive portfolio :)
The quote just means that the winning model was overfit to leaderboard. Not that there weren't better models submitted than the baseline, for else someone submitting the baseline would have won.
> If you whipped up a script but was 10 minutes late to the party, then you'd get zero gains
See, I really don't believe this. You can use the script features for longer timelines, then there is no rush. You are also not as much competing with the smart money, as you are joining them. I really don't think those few 1000s $ someone early on spends, are taking any action of the table. And the big players can't take it all.
> that almost sounds like "timing the market", which is generally known to not work for unsophisticated investors.
counter trading as in https://www.investopedia.com/terms/c/countertrend.asp
but yes, would need both sophistication and time investment, else passive way more attractive. But you can use crowdsourcing on overhyped trends as information for this strategy.
> should tell you all you need to know about their "skin in the game"
I am not saying that newspaper stock pickers solved the problem of mindless hype. But skin-in-the-game or staking is an effective counter against clueless people following trends, and moves it further away from the coin flip.
> [insert joke about how economists have predicted 15 of the last 3 recessions]
[Insert fact about how those predictions cluster around the last 3 recessions]
> allows their alpha to be diluted and get front-runned
If anything, this would happen at the real front: hedge funds would contract someone to contract an expensive New York PR firm to meme and astroturf some stock, say Palantir, to something noteworthy. Then the open planning online for anyone to see does the rest. The private Discord channel of random traders (who bought into that group with 5 BTC to have skin-in-the-game) knows what's up, and quietly rides along.
I agree it's not a perfect analogy, but the underlying point holds: there's inevitably going to be some that come out on top because of luck, rather than actually skill.
>The quote just means that the winning model was overfit to leaderboard. Not that there weren't better models submitted than the baseline, for else someone submitting the baseline would have won.
So the study is inconclusive at best when it comes to forward-looking results?
>See, I really don't believe this. You can use the script features for longer timelines, then there is no rush. You are also not as much competing with the smart money, as you are joining them. I really don't think those few 1000s $ someone early on spends, are taking any action of the table. And the big players can't take it all.
The problem is that once the information has been priced in, there isn't anything to gain anymore. For instance, let's say company A shares are selling for $100 each, and you found out that company B is planning to acquire company A at $120/share. If you found out this information before anyone else and traded on it, you can make a profit of $20/share (ignoring using leverage or derivatives). However, if you were late to the party, ie. found out this information after others did, and the price already rose to $120, then there's nothing to gain from it. Buying the shares at $120 and then selling it at $120 doesn't net you any profit. This example uses an acquisition as a pricing event, because it provides an unambiguous price target, but this can extend to other events as well, such as finding out this quarter's earnings is above/below estimates.
>but yes, would need both sophistication and time investment
therein lies the problem. There's no free lunch here. You can't blindly apply the rule and get stacks of cash. Citing "countertrend" in this case is only marginally more helpful than citing "buy low sell high".
>[Insert fact about how those predictions cluster around the last 3 recessions]
source? Here's one I found to the contrary. https://www.bloomberg.com/news/articles/2019-03-28/economist...
A recent working paper by Zidong An, Joao Tovar Jalles, and Prakash Loungani discovered that of 153 recessions in 63 countries from 1992 to 2014, only five were predicted by a consensus of private-sector economists in April of the preceding year. And the economists tended to underestimate the magnitude of the slump until the year was almost over.
Or if you got a $10k bonus, and invested it over 6 months or something.
FWIW, lump sum usually beats DCA in the long run.
Edit: also it’s important that you’re asset portfolio has asset classes that tend to be out of phase, like stocks vs bonds.
> The financial costs and benefits of DCA have also been examined in many studies using real market data, typically revealing that the strategy does not deliver on its promises and is not an ideal investment strategy.
> Recent research has highlighted the behavioural economic aspects of DCA, which allows investors to make a trade-off between the regret caused by not making the most of a rising market and that caused by investing into a falling market, which are known to be asymmetric.
There are hundreds of opportunities to do this every day, so you just jump on the most painfully obvious ones, and avoid anything uncertain.
If you have a real job, and can’t watch the market all day, every day, you don’t stand a chance. Without fail, the biggest losses in our group would come when someone tried to hop into a position while half watching the market, and then get sucked into their real work.
Once you’ve got entry down, the hardest part is training yourself to exit at the right time.
If we could I'd make a 20 year wager that every one of those people will fail to beat the market in the long run.
It's very easy to make money on "sophisticated strategies" during an historic 10 year bull run.
This is what I mean when I say treating it like it’s your job. Go back and look at the big downturn last year. To anyone who was paying attention, it looked like a car crash in slow motion.
Only to those of us with other work to do, did it look like a flash crash out of nowhere. The writing is very clearly on the wall for all of this stuff, because the big players needs days to reposition, and will be moving billions of shares, and you can literally watch them do it.
The reason active funds don’t do as well as the market is because they have to hedge. You’re always paying a premium to minimize losses when you’re hedging, and you can’t exit fast when your position is worth billions.
It’s like turning a freighter, versus turning a speed boat.
I'm not saying it's impossible to make money - I just doubt you can intuitively get a sense for the "feel" of the market for something as largely traded as SPY. SPY traded 61 million shares yesterday (at $400 per). If the smartest institutional traders with the best tools can't figure out the direction of SPY in the short run with any kind of certainty, I don't see how an "average" person can. There is enough volume in the markets for institutions to turn around a pretty big freighter.
I think this is akin to the unintuitive finding that if you randomly chose someone from your friendlist, there is good chance that this person is more popular than almost everyone else. Just being in the friendlist is a positive factor to the capability of making friends.
The vast majority of day traders is not honing their skills and information sharing inside a dedicated Discord group. Especially in crypto, these groups, and not the big Wallstreet hedge funds, are the most sophisticated and skilled at profiting from smaller markets.
> If the smartest institutional traders with the best tools can't figure out the direction of SPY in the short run with any kind of certainty
This is misunderstanding trading. It is all about uncertainty and willing to take risks if EV+ situations arises. Extremely few are figuring out the short run with any kind of certainty, and these few risk being fined or charged with market manipulation. The average person can find profitable coin flips (56% accuracy), which, while far from certain, can be flipped many times. Sometimes such flips are not possible for the bigger smarter institutional traders, because their plays use way more money, and they focus on what they learned over 30 years. Anyone starting in 2010 is able to be more knowledable about crypto trading, than someone with a 50-year trading career (who pays someone a little-less-knowledgable than you, not in-the-know of Discord or Telegram, to write an analysis).
If you’re playing with thousands, you’re playing a completely different game than someone playing with billions. You don’t have to strategize about how to exit. You just exit.
Many hedge funds outsource the execution of their trades to HFT, which scales in and out over days.
Google Archegos if you want to see what happens when you liquidate billion dollar positions in a hurry.
If you’re playing with thousands, you’re playing a completely different game than someone playing with billions. You don’t have to strategize about how to exit. You just exit.
The market crashed last year because of COVID. Nobody saw that coming.
Everyone has been predicting a major correction or recession every year for at least the past 6 years. Claiming that they predicted what was going to happen last year is pretty blatant confirmation bias.
People predict a recession every year, and then when one finally hits, they say "see, I was right! Ignore all the years where it didn't happen!"
There will be another correction in the future, we don't know when it will hit, and the same pattern will play out again.
These people are also tracking senators and congress people’s positional moves, as additional macro indicators.
There's a lot of people who think they're smart enough to time the market, but have just been lucky. In the long run, that catches up to most of them, which is one of the reasons passive investing wins out in the end, on average
The posts said that gold would see decent increase (was around 1650$/kg at the time). That everyone with hotel or travel investments was expected to severely lose, and that most such players were putting their liquid money into other investments, to counter the blow, and avoid charges of insider trading. That the Euro would be the most stable currency, when currency trading due to localized pandemic and the lockdowns effecting purchasing power. That the US stock market will see a short boom, with Fed support, and little other investment opportunities, before a crash and world-wide stagnation will become inevitable. That you want to be in two growth niches for the next 3 years: biotech, for it will see free government-funded research & development, when it can profit in the future on new high-margin (HIV/Herpes) vaccines. Plastics industry, because everything will be wrapped in plastic, environmental regulation will be low priority, and it will be overlooked by retail and play-safe pension funds.
Not only did the financial elite predicted it, they predicted it right. Then felt bad for keeping it private, when they saw US senators selling their hotel stock positions after being informed of the situation in China and prospect of a pandemic, so they posted it publicly for everyone to see and with nothing to personally gain.
The pandemic was predicted (+5 -5 year error bars). The correction was predicted. Individual recession predictors are mostly made through survivor bias. When Goldman Sachs sees a market recession upcoming, they don't put that on Twitter or a newspaper to gain a following. They have people pay for what its worth.
It is also fun going back to 4chan /biz section 5 years. People are not saying now: see, I was right. They did better than the majority of the best, highest-paid, analysts and quants and remained anonymous. But I agree it was really hard to not hit a fish when shooting in a barrel.
You seem very sure about where the market is going in the short term, you should start a hedge fund!
Or course, I'm kidding, internet financial hot takes are a dime a dozen, and generally worthless.
That is an apt analogy, which is why I believe Rentech’s Medallion fund is kept small and has better returns than other larger funds.
Active trading will is more likely to have larger swings than passive trading.
In the short-run the good times will be better and the bad-times will be worse.
In the long-run, statistically the majority (not all!) that play the game will lose over the long run to passive investors.
None of this is to argue for one of doing things over the other so long as people understand the risks that they're opting into.
1) confirmation bias. Many people have blind faith in the market and while trends are semi-reliable. There are plenty of instances that buck all trends and can take out even the most seasoned day traders accounts if the overrely.
2) a lot of times these are pump and dumb schemes, even by large hedge funds on small companies that are generally overvalued by the time the “opportunity” hits those reading the standard info sources.
So as someone simply managing my own account. A solid strategy is to avoid day trade and only place buys on something you are good to be long on and have faith in. These are big ones like Microsoft or apple or Costco.
I still invest in companies I’m very knowledgeable on but I don’t take risks on nonsense. And worst case I’m long in some stock for a while But I don’t have to monitor it to the minute nor do I have to really coughing up fees for managed funds at a massive scale.
Sure I miss plenty of plays, especially intra-day or intra-week but I also don’t lose anything on those.
There is a certain rationality to this, when you're coming from so far behind.
If you need a million dollars and you start with $200K, you set a timeline and a prudent plan.
If you need a million dollars and you start with $2K, you're so far behind[0] you may as well gamble.
I do not necessarily advocate the latter. I'm just articulating the thinking/emotion.
[0] 2000 at 7% p.a. takes 92 years to top a million if my arithmetic is correct.
If I invested in a fund that's indexed to the S&P 500, and a company doesn't do well and drops out of the index, then the fund will sell that company and buy whatever replaces them.
Ideally, sure, the fund could have known ahead of time and sold before the company dropped out of the S&P 500, but that's trying to time the market, which generally doesn't go well over longer periods of time. It wants to capture gains in the aggregate over long periods of time, not maximize gains. The more individuals and firms try to maximize gains, the more likely they are to get bit over the long term.
The company drops out of the index on poor performance because its market cap goes below some threshold, because active investors short it or sell it when its poor performance makes it overpriced. If every investor is passive, there is no mechanism for the price to reflect the company's underlying finances.
Sure, but that's a big if. We're a long way from 100% anything.
Also, a company can drop out of an index even when it's doing well just because investors are running a short campaign against it, so I would caution against the assumption that all market performance is because of poor company performance.
In general, the trend has been for most active investors to underperform the market, in part because they charge higher fees, but also because successful active investing is very hard to do consistently. People moving away from those active investors and to index funds won't hurt the market because they generally don't do as well as the market.
Now, if people move away from effective active investors, then that could lead to the problems mentioned, but I've never heard of people moving away from effective active investment.
> active strategies lose out to passive ones in the long run.
It's false if we're talking about specific strategies (e.g. Medallion Fund).
There are computerized short-term strategies that print money almost every single day, deployed in a few of the large firms.
Top 1% own 38% of the value in stocks.
Nope, this is false. Please look up the historical performance of Renaissance Technologies Medallion Fund.
Traders are pretty wired.
People building long term businesses (Like 10 year horizon plus) are on a different gravity.
Correct.
Too many passive index fund investors on this thread refuse to acknowledge that many hedge funds/proprietary trading firms consistently beat the S&P over 20-30+ years.
VTI and VOO are only 9% and 13% since inception in ~2001. Top quant firms like Citadel, Renaissance, Jane Street attain 20-40% annually after fees, over 20+ years.
On average, hedge funds underperform. But a UHNW investor is not investing in average hedge funds. They’re investing time-tested S&P-outperforming hedge funds.
The average person could never compete with RenTech.
Grandparent claimed that active investing is not good for _anybody_. A single example (like RenTech) is sufficient to disprove that claim. If you want to move the goalposts to "the average person", then it'll be an entirely different discussion.
Their historical record is very good.
Really? Because this is what the (grand)parent said:
"Whether you're an individual trader or a billionaire hedge fund manager, active strategies lose out to passive ones in the long run."
Clearly grandparent was not talking solely about the average investor.
In this simple model active investors in aggregate cannot do better than the index. Adding transaction costs, fees, etc. they'll do worse - as a group.
Other winners include tech companies and a space company.
Someone explain to me why I'm an imbecile and why I should have been invested in Vanguard index funds, something I did for decades prior to thjs.
This phenomenon has been shown repeatedly in studies of trading behaviour among individual investors (e.g. [1] and [2]), who have been found to collectively destroy wealth for all other investors. Only an absolutely minuscule proportion of traders actually beat the market.
As with any casino, there are winners and losers. But usually the house wins.
[1] https://faculty.haas.berkeley.edu/odean/papers%20current%20v...
[2] https://www.sciencedirect.com/science/article/abs/pii/S13864...
Stop comparing traders and active funds in your study citations. That's not the benchmark. I'm not a fund (which has its own issues as it has to manage 100s of millions which is different than an account like one of ours), and I'm not a day trader/trader. Buying and holding stocks is hardly a zero sum game. You're confused with day trading and options trading which DOES have two sides of a bet. There's something about humanity that some folks here fail to understand when their noses are in the numbers. Are you trying to sell to me the idea that buying AAPL in the early 2000s was a random pick? I'm done here, all that's happening is I lose points as punishment for questioning orthodoxy.
Simple: you got lucky in a bull market.
Let's revisit how you're doing in the next recession or after a couple bad bets.
If you want a deeper answer you'll have to do your own digging, as it's a big topic. But it's worth starting with the efficient markets hypothesis and reading some of the work of Jack Bogle.
There's something strange about the framing of the passive index fund scenario. Over 20-30 years? I'm not interested in beating that benchmark if I'm interested in increasing my net wealth in the next few years. Downvote away, this is my experience and feeling on the topic, not financial advice to others.
Index funds are high risk! What if there's a big dip and you find the perfect house?
Bond rates are low and a bit uncertain at the moment. What's your 'cash replacement'?
This claim is false. Some funds have overperformed year after year with high margins and (relatively) low risk, for decades. For example, Renaissance Technologies' Medallion Fund and Warren Buffett's Berkshire Hathaway. Please show me the "statistically proven reality" that explains these returns.
The Medallion fund is a whole other kettle of fish. Medallion uses extremely sophisticated models which took Jim Simons and his team of math wizards more than a decade to figure out, using vast amounts of historical data and computation. The fact that nobody else is replicating their performance should tell you just how difficult it is.
In 2019, 71% of actively managed funds lagged behind their benchmark according to the S&P. In 2020, it was "just" 57% [2]. Meanwhile, 70% of active funds have been liquidated the last 20 years. There are of course years where actively managed funds are the winners, but over time, actively managed funds tend toward the mean, either lagging or matching the S&P 500.
[1] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3197185
[2] https://www.spglobal.com/spdji/en/documents/spiva/spiva-us-y...
It should be noted that while markets may be mostly efficient, I do not think anyone is claiming they are completely efficient.
If there are price discrepancies/anomalies, they could be exploited, at least some of the time. It could be that Medallion can find some and exploit them, say, 55% of the time. But over a large volume of transactions.
Casinos make huge profits by exploit small house edges in volume:
* https://wizardofodds.com/gambling/house-edge/
There's a reason why Medallion has been closed for years: the (possible) market inefficiency exploits they're using may not scale.
This is false. Grandparent is specifically claiming that markets are completely efficient. Here is a direct quote: "Whether you're an individual trader or a billionaire hedge fund manager, active strategies lose out to passive ones in the long run."
In addition, many academics are also making this same ludicrous claim.
Yes, you have a market where participants trade against each other, and you discover that the average participant in the market does not "beat the market". That should be obvious. The question in dispute is whether _anyone_ can beat the market, and there's a mountain of evidence that certain people/funds beat the market year after year.
This is a problem for retail investors. Studies such as this one [1] have shown that the past performance of an actively managed fund does not predict its future returns. In other words, while there are certainly actively managed funds that beat the market in some years, a retail investor picking a mutual fund based on past performance is likely to be disappointed.
So how do you pick the fund that will give you high returns? Turns out this is exactly the same problem with individual stock picking, but instead of trying to pick winning stocks on the stock market, you are trying to pick winning managers in the mutual fund business. And your success in doing that ultimately comes down to chance.
[1] https://insights.som.yale.edu/insights/does-mutual-fund-s-pa...
We are in 100% agreement.
I only wanted to correct the misinformation spread by grandparent who claimed that nobody can beat the market.
Closed to outsiders:
Medallion, +76%
Open to outsiders:
RIEF, -23%
RIDA, -34%
Also the external funds are different strategies than Medallion.
Since this is in reply to me, let me ask, what's the implication here? The tone of your post sounds like you disagree with me, but it's not clear what exactly you disagree with? Grandparent claimed that no-one can beat the market. I said that Renaissance Medallion Fund beats the market. Then you post a single-year performance of +76%, which is a really good performance for 2020. So... you agree with me?
I do think it's worth pointing out that that doesn't mean that the average retail investor will generally outperform the market, even if they're sophisticated enough to have even heard of Renaissance.
Yep, I agree.
> 2. Buffet himself says: "In my view, for most people, the best thing to do is to own the S&P 500 index fund"
Again, we are in agreement. I'm not sure what exactly it is that you feel you disagree with me about? Grandparent claimed that _nobody_ can beat the market, and I provided references to evidence that some people can beat the market.
I’d rather have my AAPL over the last 5 years than VTI+BND.
The most popular index funds (VTI, VGT) only have a 20-year track record, with a paltry 9% and 13% annual return, respectively.
[1] https://www.clearbrookglobal.com/citadel-millennium-d-e-shaw...
Kenneth French (the "French" in the Fama-French asset pricing model) provides market data going back to 1972 [1] and can be used to reconstruct index fund performance.
Citadel doesn't have individual clients, and if you're not a billionaire I don't see how you'd gain access to their hedge fund.
[1] https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data...
Many funds consistently outperform the S&P by 2-3X over 30-40 years. Minimum investment, $5-10M, of course.
Buy and hold is the best option for those under USD $10 million net worth, but you must acknowledge there are semi-closed funds/prop trading firms that consistently beat the market.
But seriously, I'd rather just put money into VTI and VXUS and go back to playing video games, planning a D&D one-shot, programming a bit, or hanging out with friends in my spare time. Let the active traders waste their time poring over 10-Ks and/or charts. I'll be here having fun and taking what the market gives.
The same way you picked your passive index fund: look at 20-30+ years of data.
Unfortunately, VTI, VT, VOO all underperform the top hedge funds, when evaluated over 20 years (risk adjusted return, downside deviation, and absolute return). I’d go further back but VTI was created in 2001 whereas the hedge funds were created in 1980/1990.
Your statement that major index funds all underperform the top hedge funds is tautological, of course the ones that beat the averages are the top funds. What I'm genuinely curious is: how many hedge funds were there in 2001 and how would you identify the top ones?
The other important question is whether a retail investor can join it. I know someone like baobabKoodaa [1] would shout from the rooftops, "You're moving the goalposts, grandparent, waaaaaaaaaaah!" Well, I'm not grandparent, so my goalposts are completely different from theirs.
My goalpost is whether a retail investor like me can get in on those high-flying funds. If not, then in the retail universe, they may as well not exist. Thus, I'm better off investing in VTI/VXUS and using the rest of my spare time coming up with some funny ways to challenge my party in a D&D one-shot.
You can invest actively and intelligently. For example, my 401k offered an emerging markets fund (MGEMX) that isn’t the ideal fund from a cost structure perspective... but it performed really well for a few years. It wasn’t speculation or reckless behavior to have exposure to that sector. Portfolio rebalancing booked my gains when it was rising 30%, and I ended up doing well when 2008 killed that sector.
That doesn’t mean buy and hold doesn’t make sense either. If I was lucky and held on to an early fun money Bitcoin buy I’d be on an island right now!
...
That isn't conventional wisdom. It's not someone's opinion. It's statistically proven reality. Whether you're an individual trader or a billionaire hedge fund manager, active strategies lose out to passive ones in the long run.
> has catalyzed a lean-in mindset around investing, particularly among Gen Z.
And it will burn them, just like it burned penny stock traders in the 80s and Internet stock traders in the late 90s.
The reality is Gen Z'ers are desperate at this point and they're turning to gambling in the hopes of making up lost economic ground. And if that happens en masse, it's not gonna be pretty.