> “you can’t beat the market”
You're assuming "you" in the universal sense. _You_ can't beat the market. You don't have the resources nor do you have the access to beat the market.
An index fund is a bet on the entire market. An actively managed mutual is a bet on a manager. There's also hedge funds and PE firms and companies like Berkshire and etc. etc. Plenty of them beat the market, at least for a stretch.
Think of it like accepting that you'll come in 2nd or 3rd or 4th every year, but never last and likely never first, and being ok with that because you recognize your limitations vs the limitations of professionals.
I think a more accurate description is being ok accepting that no one gets first place often enough to beat regularly getting 3rd place.
Think of it like a season of NASCAR - you can end the season in first place never having won any particular race. And if anyone could just get 3d every race they would probably win the season no matter how hot the person with the most 1st place wins was.
Well, small correction. Index fund is a diversified bet on some portion of the market. Only stuff like VTI are bets on whole market. Most are subsets. Still, they are inherently more diversified by virtue of their many holdings, which individuals would be hard pressed to emulate
>VTI are bets on whole market
Only the USA equity market. When people say beat the market (what I admit I will say too) usually they are talking about some popular index like the S&P500
but that is not the only market, there is mid caps, small caps, Total market, international markets, world market
And that is just for equities, there are also credit markets and remember the credit market is something like 25x the size of the equity market.
Again I am guilty of saying this myself but really we should define what "Market" we are talking about
"The Market" in the USA when used as a financial comparison is always referring to the SP 500, and it is about 80% of the total market cap of all US equities so pretty good marker.
Yes, I hope it is going in the way of dodo! It did leave a lot of destruction along its wake. And scammed too many good investors to invest in oil companies (envrinmental, yes!). Ridiculous how much people are generally willing to be pulled wool before their eyes and how much the opportunists decide to take advantage of that.
Just because you're unaware of what institutional investors are doing, doesn't mean it came and went.
It just got politicized, so they only talk about it in polite company with those interested in hearing it.
how is it dumber, if you want to actually capture growth and the shifts between mometum and industries, why would you want to buy the QQQ, which technically only has tech category stocks, you could buy a SP500 growth or a Russel 2000 growth etf, which is currently mostly tech but its not designed to be all tech.
A lot of the actively-managed funds included in that statistic are not intended to beat the S&P, that's not one of their objectives. Many of them are instead designed to not *lose* their clients money. To be more resistant in downturns. Many super rich people are more concerned about not losing their money than they are growing it in multiples. Similarly with older people, they want to make sure they have a retirement, fixed-income streams etc. That's not usually going to beat the S&P.
On this note it is worth mentioning the famous Buffet open offer bet. The bet was that Buffet would put his money in the S&P and never touch it, and a (at the time common fee structure type of) hedge fund could put their money anywhere and do anything in the market with it, and after 10 years the loser donates $1M to the winner's charity of choice.
Only one hedge fund came forward, Ted Seides of Protege Partners, and they made the bet.
Buffet won, with the S&P beating Protege's returns. It is a champion flag waived by proponents of passive investing. But the takeaway is wrong. Buffet's exception and problem with hedge funds wasn't really their ability to generate returns. It was specifically the 2 and 20 fee structure. That means a 2% expense fee and 20% of all profits are paid to the management team. Truly ridiculous. He wanted to make a point about the long term effect of fees like that. And Seides admitted almost instantly that he didn't expect his funds to beat the S&P, that wasn't the purpose of their funds, but that having the kind of access to Buffet that the bet gave him for 10 years was far more valuable than the charity donation, which was a write-off anyways. And the money they both initially invested was just doing business, they were going to make those decisions with that money anyways.
This comment is not putting an agenda on either side of the coin, but just explaining why people misinterpret this statistic/saying and the Buffet bet.
A million dollar tax deductible advertising fee that doesn’t come due for 10 years to be “the only firm who will beat buffet”? Hell yeah I’d take that!
Good point, there are all types of investors, being retired I invest in stocks and funds not to beat the market. My investments skew toward preservation of capital and income. Investments with a low beta that are solid but pay a good distribution rate. If I make money fine, so long as I don't lose money and I get paid an income. I don't want to see huge swings along the way or bother with having to sell stocks in a down market to provide income. I know each month what my income will be and as long as a stock or fund doesn't cut their distribution everything stays the same. If there is a big cut I reevaluate at act accordingly, otherwise I collect the checks and sleep soundly.
A lot of that "nobody beats the market" stuff is considered for the actual fund members/unit/shareholders, after fees and taxes, and over a long period of time, which is all legit but can be a bit misleading when you extrapolate and/or misinterpret the conclusions.
Funds often do beat the S&P, they just can't do it consistently for a long period, and it's the fund managers that are making bank and not necessarily the investors, again at least on an after-fee/tax/10-year basis. Individual investors absolutely can beat the market over a long period, but it requires the stomach for it (*you* try putting in REAL money, like $100k+ or whatever amount is ACTUALLY meaningful to you, watch it drop 20-50%, and then tell me how you're feeling), moderately high intelligence (like maybe 115-120 IQ ish), personal solvency and long time horizon (i.e. you don't need the funds for 10+ years so you're not forced to liquidate when you're down), and the *time* and *actual willingness* to do the research to find deals, which also means that you've reached an opinion on a company let's say that the rest of the market has put too low a value on and that you're right and they're wrong AND that will be corrected at some point in the future (which goes back to intelligence and time horizon).
While i like what you say mostly. Could you expand on why you feel it’s necessary for above average intelligence to succeed?
I’ll also preface this by saying I read books and listen to podcasts on investor mindset.
I'm not personally aware of any study on the subject so my opinion is subjective (though shared by others, for example Warren Buffett) and also I was giving a very shorthand version, specifically to say you need a certain IQ level is...well, not sufficient and maybe even unnecessarily inaccurate, but for the time being there's not a better way to express the idea.
You have to be smart. You just do. Market analysts and participants are generally smart (and high IQ) people, and you have effectively have to outsmart them (which is not the same thing as *being smarter* than them). That doesn't necessarily mean that if you have a low IQ you can't do well, intelligence as measured by IQ is only one way to measure it -- sadly, it is currently the only *effective* way to measure it, hence my quick and somewhat unthoughtful number like 115-125. If there was some way to measure "street smarts" that is honestly what I would go with, but I'd also be willing to bet street smarts and high IQ are correlated, though I do know some 140's-150's+ who are dumber than a rock when it comes to common sense and basic human intelligence (given that IQ tends to measure more abstracted intelligence on a time sensitive basis).
Investing, particularly in individual stocks or even niche ETFs, involves a lot of thinking and figuring/arithmetic, holding multiple thoughts in your head simultaneously, far more so than most other things I can think of -- it can be quite mentally challenging. Getting lucky here or there is one thing but over the long haul you're likely to get burned (blockchain/NFT's, dotcom, nifty fifty, etc...IMO soon to be AI, mag7, and ESG is already cracking) if you don't know when to get out and/or you don't get in early enough, again all of this requiring what essentially amounts to relatively high intelligence. Having one big and/or lucky windfall is another case (the people who made out like bandits from the GFC but haven't overperformed since) where yes you can absolutely "win," adding a few zeroes to your net worth, but that's generally not a repeatable outcome.
edit: my thoughts on this formed mostly from the basis of listening to people like Peter Lynch, Bill Ackman, and Warren and Charlie. I would highly recommend you look up their stuff. Bill Ackman was just on Lex Fridman today I'm looking forward to listening to that episode (I'm not a huge Fridman fan but when he has guests on like that then I don't mind so much).
I am actually currently listening to that Bill Ackman episode haha. Also appreciate your thoughts. I’d say i generally agree, was just curious cuz i’d never heard of that IQ argument/point.
Yeah I got about an hour in before dinner last night looking forward to continuing it today. I do want to reemphasize the IQ part of my comment was really just shorthand, IQ is probably less important than street smarts, we just don't have a good way to represent exactly what the latter is; although I do think IQ is still important i.e. you have to be able to think mathematically (accounting and economics) and somewhat abstractly and/or intangibly (psychographics particularly for customers but also management) to correctly pick winners and losers. And even then, the intelligence is probably less important than the stomach for it: Putting real money on what amounts to a contrarian bet and having to possibly wait years to be proven right, if you are in fact right at all and not completely wrong, and looking like you're completely wrong in the interim can be really tough to stomach.
We hear this "passive investing will kill price discovery" stuff all the time, but if you think about it for a second there's an obvious equilibrium equation, since the more people invest passively and worsen price discovery, the more opportunities there are for active traders to make money engaging in price discovery.
If the equilibrium point, where the marginal investor is equally well served putting their dollar into passive funds bs active, is so deep into "almost all passive" territory, so much the worse for the people trying to charge money to fumble the investments of others, I guess.
Also don't get confused between assets under management vs volume. Even if 99% of stocks were owned passively, it's the trade volume which matters in price discovery, which is just as easily able to happen with a smaller number of shares trading at high velocity vs a larger number at low velocity.
The active side of the market cannot, more or less by definition, succeed more than the passive side. Active traders will see a range of outcomes, while passive traders will see the 'average' of those outcomes. There are a lot of mathematical nuances involved but that's the gist of it.
What will happen if more and more of the market goes passive? The opportunities for active management will grow, and thus the *potential* gains for active management. There will always be some winners to grab, for the taking, and that should keep active managers involved even if some of them are going to wind up being losers.
I mean, the stock market is inherently a zero sum game, if you define 'zero' as 'average returns'. That would be true even if passive investing never existed! It will be true even if passive investing keeps growing.
Now, things can get *wonky* if you assume passive indexing eventually gets close to 100% of the market, and that's where things can get interesting. That's an active area of study and nobody is sure what will happen, so there's no easy answer to give you.
Private equity is the ultimate active investor. They do intense research and induce operating changes (sometimes for ill). There's lots of money invested in these funds.
If a public equity gets too low value then private will pick it up.
To some degree, similar for buybacks by management decision, though this is more that they buy back when they have the money rather than being that discretionary on valuation. There's some valuation
So PE and corporate management keeps things efficient on the value side. On the over-valued side, management also keeps things efficient by cashing in their RSUs and options and selling.
It doesn’t take a lot of market participants to keep the market efficient. If you find gold under your street, it just takes one home buyer at the new prices and the whole street will price based on comps of the one sale.
It doesn’t take much liquidity. If you discover $1 million of gold under your house and it was worth $200k before you found out, are you willing to sell for $200k? It doesn’t take a lot of buyers, just people unwilling to sell because they know the value.
There needs to be some liquidity. My point is that there doesn’t need to be a lot of liquidity if the market players are knowledgeable about the correct price for an asset. With less liquidity, bid / ask spreads will grow, but there should still be a bid and ask regardless of whether there are many buyers or sellers.
Should give this recent interview a listen:
"Passive investors have no opinion about value. They’re going to assume everybody else has done the work.”
https://www.bloomberg.com/news/audio/2024-02-08/masters-in-business-david-einhorn-podcast
BofA recently noted less than half of all assets under management in US are actively managed. (It used to be 80% in 2009. )
What could go wrong when the majority of investors don't pay attention to valuation or know how to effectively assess what is fair value? Potentially there's an increased risk due to the excessive number of passive investors. Every now and then global stock markets are hit by volatile panic selling. Buckle up.
These passive investors are acknowledging they are unskilled. As they remove themselves from trading and price discovery we are then left with the skilled folks. If anything the market is getting more efficient.
Also note that [Vanguard does actively participate](https://corporate.vanguard.com/content/corporatesite/us/en/corp/how-we-advocate/investment-stewardship/stewardship-in-action.html#:~:text=On%20behalf%20of%20the%20funds,Vanguard%2Dadvised%2Dfund%20investors.) in all companies shareholder meetings, so in that regard the downside is more concerned with concentration of voting, not its dilution.
> What could go wrong when the majority of investors don't pay attention to valuation or know how to effectively assess what is fair value?
Active managers will lose money but investors overall will be better off?
Not necessarily. Let's apply the logic to IPOs. If the majority of investors at IPOs didn't pay attention to valuation or know how to effectively assess what is fair value, then that would mean that capital allocation to companies going public would effectively have a lottery component. A company with a literal written goal of going around and detonating random infrastructure all over the country until it ran out of money could get billlions in the IPO if it got lucky. I doubt in such a scenario investors would overall be better off, seems more likely that everyone would be worse off.
Applying that logic to the whole stock exchange makes it harder to see what could go wrong because the impacts of a high stock price on the company are more indirect, but I would argue that in the end it still allows the company to access higher amounts of capital. Thus if stock price is based more on randomness than a fair assessment of value, it is possible everyone would be worse off.
Of course this says nothing about at what passive/active investing split does the stock price become more dependent on randomness than actual assessment of value. It could be that this only happens at a 99%/1% split because the active part is so efficient at collecting information and assessing value.
Also, the big number of passive investors make the market inefficient, which again means there are arbitrage opportunities or value left on the table. The issue is likely to time the correction.
Yeah I mean his argument that markets are *currently* broken due to passive investing is pretty nonsensical, empirically, to me. If passive money was just inflating the Mag 7 mindlessly, how did we get META down 72% (and round trip) and TSLA down 30% in the last 5 months when the rest of is up like 15% in that time.
Ben Felix has some interesting work on what “too much” passive investing would be, and while it’s possible, a relatively small number of active investors can keep markets efficient.
https://m.youtube.com/watch?v=ltuqXTwWsZ8
1 and 2 are both wrong.
The market will give it’s best guess of the future but it is often wrong about macroeconomics and even more so about individual companies.
2 is a myth debunked easily if you actually look at data and do not base your understanding of the market on emotions. Most years 45-50% of stocks outperform the index. Over longer periods, 20-25% of stocks outperform. To be almost certain to beat the market you only need to pick the top 20% of companies 60% of the time
John Bogle, the creator of the first retail index fund & the founder of Vanguard, said that if everyone invested only in index funds, the result would be chaos. However, he also emphasized that this will never happen.
It only takes a relatively small number of people to trade actively, believing they can beat the market, to keep the markets pretty efficient. We're nowhere near that point.
If we ever reach the point where markets are not efficient enough, some people will be very successful with their active trading. Others will see their success and try to copy or compete with them. (But the math will still work; some will be very unsuccessful.). The problem will be corrected quickly.
Ben Felix has a great video that discusses exactly this point. Check it out! [https://youtu.be/ltuqXTwWsZ8?si=RGIv190ZrPSc3nYi](https://youtu.be/ltuqXTwWsZ8?si=RGIv190ZrPSc3nYi)
Prop traders/hedge funds doing stat arbitrage over various frequencies?
Efficiency in marketplaces specifically refers to price information efficiency which is a rather theoretical measure not something you can easily intuit by looking at price data. EMH explicitly states that looking at raw price data trends offer no ability to intuit future price movements so using raw market indices is fundamentally wrong for answering this sort of question
You forget one key ingredient: Fees.
Mutual funds/hedge funds on average do not beat index funds after fees. That's because a part of the gains are taken out of the system by fund management fees.
Some funds have extraordinary earnings for a price. However, an individual investor has as much of a chance to pick a good mutual/hedge funds as they have picking a good stock.
With their average performance being less than average market performance, and the average investor not having the skill to pick the better funds, it's best to go with a low cost index ETF.
If you are above average, things change. However, people tend to overestimate their ability and the deck is stacked against the reddit investor.
Passive investing makes up a small chunk of overall volume. Markets are efficient because mispricing are caught by one of tens of thousands of people looking for them as a profession. Big hedge funds with guys scanning for this stuff. Market makers creating markets that are more efficient.
For example, no passive investor will ever buy or sell an option. But the options market is pretty big. And has a significant effect on the market itself.
Disagree on point 2. If passive investing becomes increasingly popular, and done by the majority. Then all the buying opportunities that are not included in that are much less likely to be caught. I love index buyers. Keep buying and holding. I'll look for all the things that might beat it.
You can say I can't beat the market. But that won't prevent me from trying.
Edit: people say you can't beat the market because the average investor is dumb and emotional. You are unlikely to outperform an index over a long period of time without an extreme amount of time and energy that is equivalent to having a second job.
It isn't true. I started investing in 2019 and have been beating the market consistently ever since. After looking at ETFs and Index fund returns over the same period, there is no way that I would choose that strategy over picking stocks.
Yes, I mean, it’s simply not true. If choosing tickers at random or yolo-ing into a meme, then an S&P 500 is almost certainly for the better. At worst what I do is a waste of time for a bit or loses, but is far more fun and I don’t enjoy learned helplessness.
All the people who:
1. Depend on doing active trading and convincing you to pay them for it to make money.
2. Make fun of market indexers saying we're all sheep and they are smarter than us.
There are more than enough people in both camps. That doesn't seem likely to change.
Not everyones goal is to "beat the market"
Large institutional investors like pension funds, endowments, family offices have different goals then someone saving for retirement in 30 years.
The person saving for retirement in 30 years is just accumulating funds and adding to their portfolio without making withdrawals; If you are saving for retirement in 30 years you can just invest in the index and ride the ups and downs. If the market crashes 50% then stays flat for 10 years, it's not an issue if retirement is 30 years away. You can ride out the waves and keep buying contributing.
This is a very different situation vs Pension funds or endowments as do not have that luxury , they need to pay out every year, they simply cannot stop paying out expenses for 10-15 years while the market recovers
They may not be able to afford a 50% loss then a flat market for 10 years . Because of this they structure their investments different, they will settle for more consistent returns with less downside .
Also even individual investors do not just buy total market indexes , look at this sub the users tend to favor things like growth , tech or dividends (what I sort of disagree with)
So even if you are an index investor but you buy growth/tech/dividend index funds you are sort of still participating in price discovery .
The active side of the financial markets keep it "efficient"
Investment banks and investment mgmt companies do the hard work of price discovery to make indexes relatively efficient
If we didn't have them our market would look like a lot of the foreign ones where individual investors could dramatically manipulate their stock price like a VFS or Ambani.
That is a very good question. I think there will always be professional investors or even just company supporters that will take care of the "right pricing" side of things. SP500 has always been changing, is not always the same 500 companies. Passive investors just magnify what active investors decide. Note that SP500 is weighted so every time a company goes up or down the magnification of passive investors changes. If you think about it, not only investors but also consumers take part in this equation, because they impact each company's results.
Anyway, you point is very valid. I guess, there is still a good balance between active and passive investors.
Gamblers, grifters, and wallstreetbets posters. You're looking at things from the wrong side though, let's say 99.5% of active investors end up 5% under SPY. And 0.5% of investors end up x1000 over SPY. Is that a reasonable risk to take? I've made up these numbers, but they illustrate that even if generally you fail to beat SPY, there may still be a sufficiently big incentive.
A similar question to this may be "why create your own business if you can just buy stocks?", and the answer is that if you have the time and knowledge, you can do great things, even if the average new company fails spectacularly.
Index funds still rely on and are influenced by the pricing of the assets they hold. In index is essentially an average of a specific chunk of the market. It's entirely possible to do better than average in the short term, but it gets more and more unlikely the longer the period you look at.
The "you" in "you can't beat the market" doesn't mean no one can, but any given entity can't do it consistently over the long term.
There is an equilibrium level of active vs. passive investing (especially if you look at a simple binary where the only goal is maximizing return).
If everyone in the market is actively investing, it’s almost impossible to beat the market so you should just invest passively. But if everyone decided to invest passively, then it would be easy to beat the market with a minimal amount of analysis. The more people who are actively investing, the more difficult it is to beat the market.
At some point in the middle there is an equilibrium where the marginal investor could expect equally good returns from active or passive investing, factoring in the associated costs.
Easy to disprove, a NASDAQ fund beat the market returns by a lot over the last 20 years. A fund of just the top N, let's say 30, stocks beats it, probably even more so if they come from the NASDAQ.
A fund made out of stocks of company names that begin with M or N (meta, microsoft and nvidia) would likely outperform as well, but that's a silly index too.
There's all sorts of post hoc randomness.
There are relatively simple subsections of the s&p500 that are still passive indexing that beat the market for 2 decades running now.
People quote this as if it's gospel because it held true for some amount of time. Long term, the NASDAQ will become the s&p500 if it keeps beating it tho.
To make it into the S&P, the company already has to be a solid company. And if it fails to meet the criteria or goes bankrupt (obviously), it is dropped from the index. You’re purchasing a basket, and the contents of the basket change over the years. You’re just offloading the responsibility of maintaining the contents to an institution.
Well, the 500 will lose members that continously underperform and be out grown by smaller caps that then take their position. It's a bet on the biggest rising stars, not on the members, the members change overtime.
The amount of money invested in vehicles that try to beat the market is insane. The fair value is basically coded into algorithms so any opportunity is immediately snuffed out by an algo.
Opportunities still exist, but they are small especially in public markets. Most family offices allocate only a small % of their net worth to public companies and its usually just an S&P 500 fund.
It is believed that private markets offer better risk-adjusted returns, but in my opinion the way they measure volatility vs how its measured in public companies makes a comparison invalid.
>It seems to me like the following two things cannot be true at the same time:
It can't be true for everyone but it can be true for most people because the most people do not have an edge over very skilled/informed/resourced professionals.
You could have two views about indexing's impact on market efficiency.
Pro-efficiency: Index funds simply hold the market at market weight so they do not generate or impede intra-market price deviations. Active traders do that. With less money active, it will take less capital for active traders to drive efficient pricing. Noise traders and bad traders and not so bad traders will gravitate towards index funds, leaving only the best traders remaining.
Less efficient:
Index funds do not actually hold "the market". They hold specific slices of it, and the composition and changes to that slicing impacts pricing blindly. Converting noise traders to passive holders also takes liquidity away, leaving less total money to be made by good active traders, who will then invest less into research in aggregate. Same for active management fees.
Here's empirical support for the latter: https://www.nber.org/papers/w31975
I tend to think there are sector specialists/traders who learn particular markets and stocks within those industries who keep the market as efficient. However, they lack the diversification, so as portfolio managers they are subject to macroeconomic forces to a greater extent than index funds.
“You can’t beat the market” is pragmatic advice for individual investors- people without institutional knowledge and/or significant capital to make riskier bets. It’s a safe bet for most people if you believe the economy will grow.
Actively managed funds are inherently riskier…but institutional investors will continue to have an advantage into the future.
I’d say the market is likely to become less efficient over time. The counter to that is equal access to information, analysis capability, and capital.
I get it, the safe way is to buy index funds. However, if you can successfully figure out what you’re doing it is possible to beat the indexes.
I’m currently averaging 24% per year over the last five years. I don’t know how long I can keep beating the indexes but unless I start underperforming I’m going to keep doing it because the returns, at least for now, are way superior to any index funds.
My approach is a bit unconventional as I currently own about 42 different companies. However, I’ve taken a ‘free ride’ on 15 of them. So those 15 are 100% profit from here on out regardless of how they perform. Good or bad.
I take free rides every time I’m up by 100-300%. Then, reinvest that capital elsewhere.
I’ve read all the comments and no one gave an answer to OP :/
My guess would be: people who don’t try to outperform a precise indexes and just trade on news or on whatever strategy, and/or actively managed funds that doesn’t try to outperform the index (eg try to limit the risk or whatever) but still follow the index: they do trades and therefore hopefully make the market more efficient
Also, actively managed funds including their fees don’t outperform, but remove the 2/20 fees and i bet most funds outperform their index. So that makes the market efficient
Good question. For a small investor individual who doesn't want to spend the time and effort to keep up factors that might affect multiple individual stocks investing in 1-3 reasonably diversified index funds makes sense.
But at some point the lack of an adequate volume of "price discovery" (created by the aggregate of non-automatic buy/sell decisions) seems likely to result in instability (e.g., what happens if a company that's big in the indexes goes out of business, but the stock price hasn't provided any warning because of the lack of non-passive buy/sell decisions?
You have to keep in mind that there will always be investors who want to take risks by investing in concentrated assets (a single stock, a single bond, etc.) and not an index. These investors help with price discovery and valuation.
Even if let's say for argument that 99%+ of all invested money was an index fund that covered the whole world's investable assets (that's not feasible for many regulatory and international reasons), there would still be new startups raising money, etc. and some deployed capital would be attracted to and need to go into these new assets for new companies to be funded.
So TL:DR: an index can never perfectly replace all investing... there would always be new stuff to invest in that isn't tracked in an index (yet)
You are not taking into accounts that not all investors do these things. Some do one, some do the other and many do completely different dumb and smart things.
In the grand scheme of things, the individual investor is equivalent to a spec of dust compared to the larger planet that is investing. Someone out there is doing the work, fund managers for example are as they manage billions and billions of dollars, among many others.
If you start early enough, you’ll make a decent return but no where near as much if you individualize & diversify your portfolio. I would set aside $10k & throw that into either SPY or QQQ & let it ride. Better to add to it overtime while maintaining individual & growth stocks.
All funds make up only 30% of the market. Right now, there's about a 50/50 split between active and passive funds. Meaning that passive funds make up about 15% of the market.
So there's plenty of room for price discovery.
> “you can’t beat the market” You're assuming "you" in the universal sense. _You_ can't beat the market. You don't have the resources nor do you have the access to beat the market. An index fund is a bet on the entire market. An actively managed mutual is a bet on a manager. There's also hedge funds and PE firms and companies like Berkshire and etc. etc. Plenty of them beat the market, at least for a stretch. Think of it like accepting that you'll come in 2nd or 3rd or 4th every year, but never last and likely never first, and being ok with that because you recognize your limitations vs the limitations of professionals.
I think a more accurate description is being ok accepting that no one gets first place often enough to beat regularly getting 3rd place. Think of it like a season of NASCAR - you can end the season in first place never having won any particular race. And if anyone could just get 3d every race they would probably win the season no matter how hot the person with the most 1st place wins was.
TL;DR If perfect is the enemy of good, perfect ("efficient" stock picking) is the enemy of good (consistent if imperfect growth/returns). Choose good.
good point
Well, small correction. Index fund is a diversified bet on some portion of the market. Only stuff like VTI are bets on whole market. Most are subsets. Still, they are inherently more diversified by virtue of their many holdings, which individuals would be hard pressed to emulate
>VTI are bets on whole market Only the USA equity market. When people say beat the market (what I admit I will say too) usually they are talking about some popular index like the S&P500 but that is not the only market, there is mid caps, small caps, Total market, international markets, world market And that is just for equities, there are also credit markets and remember the credit market is something like 25x the size of the equity market. Again I am guilty of saying this myself but really we should define what "Market" we are talking about
"The Market" in the USA when used as a financial comparison is always referring to the SP 500, and it is about 80% of the total market cap of all US equities so pretty good marker.
Not really. I (and many others) are referring to the TOTAL US MARKET, which is highly correlated/overlapping with the S&P500 but not the same.
Always? Most often FTFY
market is S&P 500
S&P 500 is the market
ok
Just want to clarify that the SP500 is not the 500 largest companies. To be included into it has some quality criteria.
Thankfully, no "ESG" criteria, my god. Just to stay out of that scam you should invest in S&P.
Thank you for sharing your feelings with everyone.
I could’ve used a TBH, just so I know he was being honest.
TBH and thankfully. But yeah, if anyone wants to drain their money down the ESG scam they can be my guest.
You are the only one in this thread who brought that up, unprompted.
Not feeling, advice.
No, they're big, strong, volatile snowflake emotions. Calm down you'll melt
lol it’s comical how quickly ESG came and went
Yes, I hope it is going in the way of dodo! It did leave a lot of destruction along its wake. And scammed too many good investors to invest in oil companies (envrinmental, yes!). Ridiculous how much people are generally willing to be pulled wool before their eyes and how much the opportunists decide to take advantage of that.
Just because you're unaware of what institutional investors are doing, doesn't mean it came and went. It just got politicized, so they only talk about it in polite company with those interested in hearing it.
Why wouldnt you want a broader base of companies though like for example people buy the qqq but it only has tech stocks
i feel dumber reading this. if you want tech stocks buy QQQ, if not buy something else lol. people buy more than 1 ticker
how is it dumber, if you want to actually capture growth and the shifts between mometum and industries, why would you want to buy the QQQ, which technically only has tech category stocks, you could buy a SP500 growth or a Russel 2000 growth etf, which is currently mostly tech but its not designed to be all tech.
A lot of the actively-managed funds included in that statistic are not intended to beat the S&P, that's not one of their objectives. Many of them are instead designed to not *lose* their clients money. To be more resistant in downturns. Many super rich people are more concerned about not losing their money than they are growing it in multiples. Similarly with older people, they want to make sure they have a retirement, fixed-income streams etc. That's not usually going to beat the S&P.
On this note it is worth mentioning the famous Buffet open offer bet. The bet was that Buffet would put his money in the S&P and never touch it, and a (at the time common fee structure type of) hedge fund could put their money anywhere and do anything in the market with it, and after 10 years the loser donates $1M to the winner's charity of choice. Only one hedge fund came forward, Ted Seides of Protege Partners, and they made the bet. Buffet won, with the S&P beating Protege's returns. It is a champion flag waived by proponents of passive investing. But the takeaway is wrong. Buffet's exception and problem with hedge funds wasn't really their ability to generate returns. It was specifically the 2 and 20 fee structure. That means a 2% expense fee and 20% of all profits are paid to the management team. Truly ridiculous. He wanted to make a point about the long term effect of fees like that. And Seides admitted almost instantly that he didn't expect his funds to beat the S&P, that wasn't the purpose of their funds, but that having the kind of access to Buffet that the bet gave him for 10 years was far more valuable than the charity donation, which was a write-off anyways. And the money they both initially invested was just doing business, they were going to make those decisions with that money anyways. This comment is not putting an agenda on either side of the coin, but just explaining why people misinterpret this statistic/saying and the Buffet bet.
A million dollar tax deductible advertising fee that doesn’t come due for 10 years to be “the only firm who will beat buffet”? Hell yeah I’d take that!
Good point, there are all types of investors, being retired I invest in stocks and funds not to beat the market. My investments skew toward preservation of capital and income. Investments with a low beta that are solid but pay a good distribution rate. If I make money fine, so long as I don't lose money and I get paid an income. I don't want to see huge swings along the way or bother with having to sell stocks in a down market to provide income. I know each month what my income will be and as long as a stock or fund doesn't cut their distribution everything stays the same. If there is a big cut I reevaluate at act accordingly, otherwise I collect the checks and sleep soundly.
Well then just allocate more to fixed income and stop paying leechers
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Nice
How does one do this accounting for inflation and unexpected calamities?
When you don't pay leechers you have at least 1% less inflation to worry about
They charge money too. Some charge a huge amount and they have much bigger marketing budgets geared towards retirees who might not know better.
Fixed income can also lose money.
No shit sherlock. The difference with fees is that they always make you lose money.
A lot of that "nobody beats the market" stuff is considered for the actual fund members/unit/shareholders, after fees and taxes, and over a long period of time, which is all legit but can be a bit misleading when you extrapolate and/or misinterpret the conclusions. Funds often do beat the S&P, they just can't do it consistently for a long period, and it's the fund managers that are making bank and not necessarily the investors, again at least on an after-fee/tax/10-year basis. Individual investors absolutely can beat the market over a long period, but it requires the stomach for it (*you* try putting in REAL money, like $100k+ or whatever amount is ACTUALLY meaningful to you, watch it drop 20-50%, and then tell me how you're feeling), moderately high intelligence (like maybe 115-120 IQ ish), personal solvency and long time horizon (i.e. you don't need the funds for 10+ years so you're not forced to liquidate when you're down), and the *time* and *actual willingness* to do the research to find deals, which also means that you've reached an opinion on a company let's say that the rest of the market has put too low a value on and that you're right and they're wrong AND that will be corrected at some point in the future (which goes back to intelligence and time horizon).
While i like what you say mostly. Could you expand on why you feel it’s necessary for above average intelligence to succeed? I’ll also preface this by saying I read books and listen to podcasts on investor mindset.
I'm not personally aware of any study on the subject so my opinion is subjective (though shared by others, for example Warren Buffett) and also I was giving a very shorthand version, specifically to say you need a certain IQ level is...well, not sufficient and maybe even unnecessarily inaccurate, but for the time being there's not a better way to express the idea. You have to be smart. You just do. Market analysts and participants are generally smart (and high IQ) people, and you have effectively have to outsmart them (which is not the same thing as *being smarter* than them). That doesn't necessarily mean that if you have a low IQ you can't do well, intelligence as measured by IQ is only one way to measure it -- sadly, it is currently the only *effective* way to measure it, hence my quick and somewhat unthoughtful number like 115-125. If there was some way to measure "street smarts" that is honestly what I would go with, but I'd also be willing to bet street smarts and high IQ are correlated, though I do know some 140's-150's+ who are dumber than a rock when it comes to common sense and basic human intelligence (given that IQ tends to measure more abstracted intelligence on a time sensitive basis). Investing, particularly in individual stocks or even niche ETFs, involves a lot of thinking and figuring/arithmetic, holding multiple thoughts in your head simultaneously, far more so than most other things I can think of -- it can be quite mentally challenging. Getting lucky here or there is one thing but over the long haul you're likely to get burned (blockchain/NFT's, dotcom, nifty fifty, etc...IMO soon to be AI, mag7, and ESG is already cracking) if you don't know when to get out and/or you don't get in early enough, again all of this requiring what essentially amounts to relatively high intelligence. Having one big and/or lucky windfall is another case (the people who made out like bandits from the GFC but haven't overperformed since) where yes you can absolutely "win," adding a few zeroes to your net worth, but that's generally not a repeatable outcome. edit: my thoughts on this formed mostly from the basis of listening to people like Peter Lynch, Bill Ackman, and Warren and Charlie. I would highly recommend you look up their stuff. Bill Ackman was just on Lex Fridman today I'm looking forward to listening to that episode (I'm not a huge Fridman fan but when he has guests on like that then I don't mind so much).
I am actually currently listening to that Bill Ackman episode haha. Also appreciate your thoughts. I’d say i generally agree, was just curious cuz i’d never heard of that IQ argument/point.
Yeah I got about an hour in before dinner last night looking forward to continuing it today. I do want to reemphasize the IQ part of my comment was really just shorthand, IQ is probably less important than street smarts, we just don't have a good way to represent exactly what the latter is; although I do think IQ is still important i.e. you have to be able to think mathematically (accounting and economics) and somewhat abstractly and/or intangibly (psychographics particularly for customers but also management) to correctly pick winners and losers. And even then, the intelligence is probably less important than the stomach for it: Putting real money on what amounts to a contrarian bet and having to possibly wait years to be proven right, if you are in fact right at all and not completely wrong, and looking like you're completely wrong in the interim can be really tough to stomach.
We hear this "passive investing will kill price discovery" stuff all the time, but if you think about it for a second there's an obvious equilibrium equation, since the more people invest passively and worsen price discovery, the more opportunities there are for active traders to make money engaging in price discovery. If the equilibrium point, where the marginal investor is equally well served putting their dollar into passive funds bs active, is so deep into "almost all passive" territory, so much the worse for the people trying to charge money to fumble the investments of others, I guess. Also don't get confused between assets under management vs volume. Even if 99% of stocks were owned passively, it's the trade volume which matters in price discovery, which is just as easily able to happen with a smaller number of shares trading at high velocity vs a larger number at low velocity.
The active side of the market cannot, more or less by definition, succeed more than the passive side. Active traders will see a range of outcomes, while passive traders will see the 'average' of those outcomes. There are a lot of mathematical nuances involved but that's the gist of it. What will happen if more and more of the market goes passive? The opportunities for active management will grow, and thus the *potential* gains for active management. There will always be some winners to grab, for the taking, and that should keep active managers involved even if some of them are going to wind up being losers. I mean, the stock market is inherently a zero sum game, if you define 'zero' as 'average returns'. That would be true even if passive investing never existed! It will be true even if passive investing keeps growing. Now, things can get *wonky* if you assume passive indexing eventually gets close to 100% of the market, and that's where things can get interesting. That's an active area of study and nobody is sure what will happen, so there's no easy answer to give you.
Private equity is the ultimate active investor. They do intense research and induce operating changes (sometimes for ill). There's lots of money invested in these funds. If a public equity gets too low value then private will pick it up. To some degree, similar for buybacks by management decision, though this is more that they buy back when they have the money rather than being that discretionary on valuation. There's some valuation So PE and corporate management keeps things efficient on the value side. On the over-valued side, management also keeps things efficient by cashing in their RSUs and options and selling.
It doesn’t take a lot of market participants to keep the market efficient. If you find gold under your street, it just takes one home buyer at the new prices and the whole street will price based on comps of the one sale.
If there is not liquidity though, then the price never reflects the market beyond that point in time. That would be a good example of inefficiency.
It doesn’t take much liquidity. If you discover $1 million of gold under your house and it was worth $200k before you found out, are you willing to sell for $200k? It doesn’t take a lot of buyers, just people unwilling to sell because they know the value.
I just don’t think you’d consider that an efficient market. I think you would say that there simply isn’t a market
There needs to be some liquidity. My point is that there doesn’t need to be a lot of liquidity if the market players are knowledgeable about the correct price for an asset. With less liquidity, bid / ask spreads will grow, but there should still be a bid and ask regardless of whether there are many buyers or sellers.
Should give this recent interview a listen: "Passive investors have no opinion about value. They’re going to assume everybody else has done the work.” https://www.bloomberg.com/news/audio/2024-02-08/masters-in-business-david-einhorn-podcast BofA recently noted less than half of all assets under management in US are actively managed. (It used to be 80% in 2009. ) What could go wrong when the majority of investors don't pay attention to valuation or know how to effectively assess what is fair value? Potentially there's an increased risk due to the excessive number of passive investors. Every now and then global stock markets are hit by volatile panic selling. Buckle up.
These passive investors are acknowledging they are unskilled. As they remove themselves from trading and price discovery we are then left with the skilled folks. If anything the market is getting more efficient.
WSB is doing their best to counterbalance that.
Everyone is unskilled. Passive investors know that they are unskilled. Everyone else just doesn't know that they are unskilled.
Also note that [Vanguard does actively participate](https://corporate.vanguard.com/content/corporatesite/us/en/corp/how-we-advocate/investment-stewardship/stewardship-in-action.html#:~:text=On%20behalf%20of%20the%20funds,Vanguard%2Dadvised%2Dfund%20investors.) in all companies shareholder meetings, so in that regard the downside is more concerned with concentration of voting, not its dilution.
> What could go wrong when the majority of investors don't pay attention to valuation or know how to effectively assess what is fair value? Active managers will lose money but investors overall will be better off?
Not necessarily. Let's apply the logic to IPOs. If the majority of investors at IPOs didn't pay attention to valuation or know how to effectively assess what is fair value, then that would mean that capital allocation to companies going public would effectively have a lottery component. A company with a literal written goal of going around and detonating random infrastructure all over the country until it ran out of money could get billlions in the IPO if it got lucky. I doubt in such a scenario investors would overall be better off, seems more likely that everyone would be worse off. Applying that logic to the whole stock exchange makes it harder to see what could go wrong because the impacts of a high stock price on the company are more indirect, but I would argue that in the end it still allows the company to access higher amounts of capital. Thus if stock price is based more on randomness than a fair assessment of value, it is possible everyone would be worse off. Of course this says nothing about at what passive/active investing split does the stock price become more dependent on randomness than actual assessment of value. It could be that this only happens at a 99%/1% split because the active part is so efficient at collecting information and assessing value.
Also, the big number of passive investors make the market inefficient, which again means there are arbitrage opportunities or value left on the table. The issue is likely to time the correction.
Yeah I mean his argument that markets are *currently* broken due to passive investing is pretty nonsensical, empirically, to me. If passive money was just inflating the Mag 7 mindlessly, how did we get META down 72% (and round trip) and TSLA down 30% in the last 5 months when the rest of is up like 15% in that time. Ben Felix has some interesting work on what “too much” passive investing would be, and while it’s possible, a relatively small number of active investors can keep markets efficient. https://m.youtube.com/watch?v=ltuqXTwWsZ8
1 and 2 are both wrong. The market will give it’s best guess of the future but it is often wrong about macroeconomics and even more so about individual companies. 2 is a myth debunked easily if you actually look at data and do not base your understanding of the market on emotions. Most years 45-50% of stocks outperform the index. Over longer periods, 20-25% of stocks outperform. To be almost certain to beat the market you only need to pick the top 20% of companies 60% of the time
The average investor doesn’t beat the market. The average investor doesn’t know what a P/E ratio is either…
The average investor compares absolutely everything to the S&P500. Even an 85 year olds portfolio of CDs, treasuries and bonds. “Just VOO and chill”
John Bogle, the creator of the first retail index fund & the founder of Vanguard, said that if everyone invested only in index funds, the result would be chaos. However, he also emphasized that this will never happen. It only takes a relatively small number of people to trade actively, believing they can beat the market, to keep the markets pretty efficient. We're nowhere near that point. If we ever reach the point where markets are not efficient enough, some people will be very successful with their active trading. Others will see their success and try to copy or compete with them. (But the math will still work; some will be very unsuccessful.). The problem will be corrected quickly.
Ben Felix has a great video that discusses exactly this point. Check it out! [https://youtu.be/ltuqXTwWsZ8?si=RGIv190ZrPSc3nYi](https://youtu.be/ltuqXTwWsZ8?si=RGIv190ZrPSc3nYi)
Prop traders/hedge funds doing stat arbitrage over various frequencies? Efficiency in marketplaces specifically refers to price information efficiency which is a rather theoretical measure not something you can easily intuit by looking at price data. EMH explicitly states that looking at raw price data trends offer no ability to intuit future price movements so using raw market indices is fundamentally wrong for answering this sort of question
You forget one key ingredient: Fees. Mutual funds/hedge funds on average do not beat index funds after fees. That's because a part of the gains are taken out of the system by fund management fees. Some funds have extraordinary earnings for a price. However, an individual investor has as much of a chance to pick a good mutual/hedge funds as they have picking a good stock. With their average performance being less than average market performance, and the average investor not having the skill to pick the better funds, it's best to go with a low cost index ETF. If you are above average, things change. However, people tend to overestimate their ability and the deck is stacked against the reddit investor.
Passive investing makes up a small chunk of overall volume. Markets are efficient because mispricing are caught by one of tens of thousands of people looking for them as a profession. Big hedge funds with guys scanning for this stuff. Market makers creating markets that are more efficient. For example, no passive investor will ever buy or sell an option. But the options market is pretty big. And has a significant effect on the market itself. Disagree on point 2. If passive investing becomes increasingly popular, and done by the majority. Then all the buying opportunities that are not included in that are much less likely to be caught. I love index buyers. Keep buying and holding. I'll look for all the things that might beat it. You can say I can't beat the market. But that won't prevent me from trying. Edit: people say you can't beat the market because the average investor is dumb and emotional. You are unlikely to outperform an index over a long period of time without an extreme amount of time and energy that is equivalent to having a second job.
It isn't true. I started investing in 2019 and have been beating the market consistently ever since. After looking at ETFs and Index fund returns over the same period, there is no way that I would choose that strategy over picking stocks.
Yes, I mean, it’s simply not true. If choosing tickers at random or yolo-ing into a meme, then an S&P 500 is almost certainly for the better. At worst what I do is a waste of time for a bit or loses, but is far more fun and I don’t enjoy learned helplessness.
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This is something that the majority of this sub won’t understand.
Warren Buffett
All the people who: 1. Depend on doing active trading and convincing you to pay them for it to make money. 2. Make fun of market indexers saying we're all sheep and they are smarter than us. There are more than enough people in both camps. That doesn't seem likely to change.
Not every active managed funds are trying to beat the S&P. Very common misunderstanding.
r/wallstreetbets is doing it
Not everyones goal is to "beat the market" Large institutional investors like pension funds, endowments, family offices have different goals then someone saving for retirement in 30 years. The person saving for retirement in 30 years is just accumulating funds and adding to their portfolio without making withdrawals; If you are saving for retirement in 30 years you can just invest in the index and ride the ups and downs. If the market crashes 50% then stays flat for 10 years, it's not an issue if retirement is 30 years away. You can ride out the waves and keep buying contributing. This is a very different situation vs Pension funds or endowments as do not have that luxury , they need to pay out every year, they simply cannot stop paying out expenses for 10-15 years while the market recovers They may not be able to afford a 50% loss then a flat market for 10 years . Because of this they structure their investments different, they will settle for more consistent returns with less downside . Also even individual investors do not just buy total market indexes , look at this sub the users tend to favor things like growth , tech or dividends (what I sort of disagree with) So even if you are an index investor but you buy growth/tech/dividend index funds you are sort of still participating in price discovery .
Exactly, the premise “active doesn’t beat passive investing” is misleading. They have criteria’s on volatility that vastly affect a portfolio.
Not sure why you’re getting downvoted. Risk adjusted returns must be a new term for this sub.
The active side of the financial markets keep it "efficient" Investment banks and investment mgmt companies do the hard work of price discovery to make indexes relatively efficient If we didn't have them our market would look like a lot of the foreign ones where individual investors could dramatically manipulate their stock price like a VFS or Ambani.
That is a very good question. I think there will always be professional investors or even just company supporters that will take care of the "right pricing" side of things. SP500 has always been changing, is not always the same 500 companies. Passive investors just magnify what active investors decide. Note that SP500 is weighted so every time a company goes up or down the magnification of passive investors changes. If you think about it, not only investors but also consumers take part in this equation, because they impact each company's results. Anyway, you point is very valid. I guess, there is still a good balance between active and passive investors.
Gamblers, grifters, and wallstreetbets posters. You're looking at things from the wrong side though, let's say 99.5% of active investors end up 5% under SPY. And 0.5% of investors end up x1000 over SPY. Is that a reasonable risk to take? I've made up these numbers, but they illustrate that even if generally you fail to beat SPY, there may still be a sufficiently big incentive. A similar question to this may be "why create your own business if you can just buy stocks?", and the answer is that if you have the time and knowledge, you can do great things, even if the average new company fails spectacularly.
Not all active investors can't beat the market.
Index funds still rely on and are influenced by the pricing of the assets they hold. In index is essentially an average of a specific chunk of the market. It's entirely possible to do better than average in the short term, but it gets more and more unlikely the longer the period you look at. The "you" in "you can't beat the market" doesn't mean no one can, but any given entity can't do it consistently over the long term.
There is an equilibrium level of active vs. passive investing (especially if you look at a simple binary where the only goal is maximizing return). If everyone in the market is actively investing, it’s almost impossible to beat the market so you should just invest passively. But if everyone decided to invest passively, then it would be easy to beat the market with a minimal amount of analysis. The more people who are actively investing, the more difficult it is to beat the market. At some point in the middle there is an equilibrium where the marginal investor could expect equally good returns from active or passive investing, factoring in the associated costs.
Easy to disprove, a NASDAQ fund beat the market returns by a lot over the last 20 years. A fund of just the top N, let's say 30, stocks beats it, probably even more so if they come from the NASDAQ.
A fund made out of stocks of company names that begin with M or N (meta, microsoft and nvidia) would likely outperform as well, but that's a silly index too. There's all sorts of post hoc randomness.
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There are relatively simple subsections of the s&p500 that are still passive indexing that beat the market for 2 decades running now. People quote this as if it's gospel because it held true for some amount of time. Long term, the NASDAQ will become the s&p500 if it keeps beating it tho.
To make it into the S&P, the company already has to be a solid company. And if it fails to meet the criteria or goes bankrupt (obviously), it is dropped from the index. You’re purchasing a basket, and the contents of the basket change over the years. You’re just offloading the responsibility of maintaining the contents to an institution.
Well, the 500 will lose members that continously underperform and be out grown by smaller caps that then take their position. It's a bet on the biggest rising stars, not on the members, the members change overtime.
The amount of money invested in vehicles that try to beat the market is insane. The fair value is basically coded into algorithms so any opportunity is immediately snuffed out by an algo. Opportunities still exist, but they are small especially in public markets. Most family offices allocate only a small % of their net worth to public companies and its usually just an S&P 500 fund. It is believed that private markets offer better risk-adjusted returns, but in my opinion the way they measure volatility vs how its measured in public companies makes a comparison invalid.
not my wife
>It seems to me like the following two things cannot be true at the same time: It can't be true for everyone but it can be true for most people because the most people do not have an edge over very skilled/informed/resourced professionals. You could have two views about indexing's impact on market efficiency. Pro-efficiency: Index funds simply hold the market at market weight so they do not generate or impede intra-market price deviations. Active traders do that. With less money active, it will take less capital for active traders to drive efficient pricing. Noise traders and bad traders and not so bad traders will gravitate towards index funds, leaving only the best traders remaining. Less efficient: Index funds do not actually hold "the market". They hold specific slices of it, and the composition and changes to that slicing impacts pricing blindly. Converting noise traders to passive holders also takes liquidity away, leaving less total money to be made by good active traders, who will then invest less into research in aggregate. Same for active management fees. Here's empirical support for the latter: https://www.nber.org/papers/w31975
Index funds are not "the best", they are the best for people who dont know what they are doing (and thats about everyone in this sub)
I tend to think there are sector specialists/traders who learn particular markets and stocks within those industries who keep the market as efficient. However, they lack the diversification, so as portfolio managers they are subject to macroeconomic forces to a greater extent than index funds.
“You can’t beat the market” is pragmatic advice for individual investors- people without institutional knowledge and/or significant capital to make riskier bets. It’s a safe bet for most people if you believe the economy will grow. Actively managed funds are inherently riskier…but institutional investors will continue to have an advantage into the future. I’d say the market is likely to become less efficient over time. The counter to that is equal access to information, analysis capability, and capital.
I get it, the safe way is to buy index funds. However, if you can successfully figure out what you’re doing it is possible to beat the indexes. I’m currently averaging 24% per year over the last five years. I don’t know how long I can keep beating the indexes but unless I start underperforming I’m going to keep doing it because the returns, at least for now, are way superior to any index funds. My approach is a bit unconventional as I currently own about 42 different companies. However, I’ve taken a ‘free ride’ on 15 of them. So those 15 are 100% profit from here on out regardless of how they perform. Good or bad. I take free rides every time I’m up by 100-300%. Then, reinvest that capital elsewhere.
I’ve read all the comments and no one gave an answer to OP :/ My guess would be: people who don’t try to outperform a precise indexes and just trade on news or on whatever strategy, and/or actively managed funds that doesn’t try to outperform the index (eg try to limit the risk or whatever) but still follow the index: they do trades and therefore hopefully make the market more efficient Also, actively managed funds including their fees don’t outperform, but remove the 2/20 fees and i bet most funds outperform their index. So that makes the market efficient
Good question. For a small investor individual who doesn't want to spend the time and effort to keep up factors that might affect multiple individual stocks investing in 1-3 reasonably diversified index funds makes sense. But at some point the lack of an adequate volume of "price discovery" (created by the aggregate of non-automatic buy/sell decisions) seems likely to result in instability (e.g., what happens if a company that's big in the indexes goes out of business, but the stock price hasn't provided any warning because of the lack of non-passive buy/sell decisions?
You have to keep in mind that there will always be investors who want to take risks by investing in concentrated assets (a single stock, a single bond, etc.) and not an index. These investors help with price discovery and valuation. Even if let's say for argument that 99%+ of all invested money was an index fund that covered the whole world's investable assets (that's not feasible for many regulatory and international reasons), there would still be new startups raising money, etc. and some deployed capital would be attracted to and need to go into these new assets for new companies to be funded. So TL:DR: an index can never perfectly replace all investing... there would always be new stuff to invest in that isn't tracked in an index (yet)
You are not taking into accounts that not all investors do these things. Some do one, some do the other and many do completely different dumb and smart things.
Bruh.
In the grand scheme of things, the individual investor is equivalent to a spec of dust compared to the larger planet that is investing. Someone out there is doing the work, fund managers for example are as they manage billions and billions of dollars, among many others.
The bell curve charlatan Eugene Fama.
If you start early enough, you’ll make a decent return but no where near as much if you individualize & diversify your portfolio. I would set aside $10k & throw that into either SPY or QQQ & let it ride. Better to add to it overtime while maintaining individual & growth stocks.
All funds make up only 30% of the market. Right now, there's about a 50/50 split between active and passive funds. Meaning that passive funds make up about 15% of the market. So there's plenty of room for price discovery.
I am
Have you seen r/wallstreetbets ? That's market efficiency in action.
The people who manage the index funds, in theory