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Matt Levine has a pretty balanced perspective on the matter: http://www.bloombergview.com/articles/2015-07-22/index-funds-may-work-a-little-too-well http://www.

Matt Levine has a pretty balanced perspective on the matter: http://www.bloombergview.com/articles/2015-07-22/index-funds-may-work-a-little-too-well http://www.bloombergview.com/articles/2015-07-22/index-funds... His opinion iirc is that at some point there will be an inflection point where there will once again be profits to be had through information discovery, and the two forces will balance out.

JoshTriplett 11y ago
There are always profits, and losses, to be had through attempting to beat the market. The trick is whether anyone can consistently beat the market, time and time again, such that their long-term return reliably exceeds that of the market itself. For that, I'd refer to http://longbets.org/362/ http://longbets.org/362/ .
- n72 11y ago
  The point is is that it becomes easier to beat the market the more people are indexing. Thus there become more people consistently beating the market. Identification of such is still an issue, but not as difficult.
  - tosseraccount 11y ago
    How Many Mutual Funds Routinely Rout the Market? zero. "Look more closely at those gaudy returns, however, and you may see something startling. The truth is that very few professional investors have actually managed to outperform the rising market consistently over those years. In fact, based on the updated findings and definitions of a particular study, it appears that no mutual fund managers have." http://www.nytimes.com/2015/03/15/your-money/how-many-mutual-funds-routinely-rout-the-market-zero.html http://www.nytimes.com/2015/03/15/your-money/how-many-mutual...
    - hkmurakami 11y ago
      At this point, Mutual Funds are the bottom of the barrel with respect to attracting talent for active management. There are plenty of examples of active funds that have consistently beat the market. ex: Since Horseman's inception in February 2001, the fund has achieved annualized returns of 14.79%, according to HSBC. http://www.bloomberg.com/news/articles/2016-01-06/horseman-clark-s-love-of-losers-powers-20-gain-in-hedge-fund http://www.bloomberg.com/news/articles/2016-01-06/horseman-c...
      - tosseraccount 11y ago
        This fund? https://hedgefundranks.com/fund/909 https://hedgefundranks.com/fund/909
        hkmurakami 11y ago
        seems to match up. http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2016/01/horseman%202.jpg http://www.zerohedge.com/sites/default/files/images/user5/im...
      - ericd 11y ago
        According to A Random Walk Down Wall Street, there are many examples of funds that have consistently beat the market over 5-10 years, but there are very few that outperform the market over a longer time horizon, and oftentimes they underperforming in the subsequent time periods (Peter Lynch's Magellan fund is the one counterexample given).
    - n72 11y ago
      I'm as big a boglehead as there is. Nevertheless, imagine you're the only person in the world not indexing. It's going to be quite easy to beat the market. Everyone else in existence is using market cap as the sole criterion for determining where to put their money. In this case all the other indicators for success are being ignored and not priced into the current price of the stock. In other words, if the whole world indexes the market becomes very inefficient.
- AnthonyMouse 11y ago
  > There are always profits, and losses, to be had through attempting to beat the market. In this context the problem is that buying into an index fund does beat the market, because it simultaneously creates and then takes advantage of a bubble in the price of stocks in the index. The price of indexed stocks goes up because index funds are buying them. Then people buy into index funds because they're going up. In theory non-index investors will then sell the indexed stocks once they're overpriced, but they can see the feedback loop. If more people are expected to invest in index funds in the future then the future demand for indexed shares will be even higher and the indexed shares will be worth even more tomorrow, so they become part of the bubble instead of correcting it.
  - simo7 11y ago
    > an index fund does beat the market market = index fund (S&P 500 based). How can an index fund beat the market, if an index fund IS the market?
    - vostok 11y ago
      An index fund is not its index. The distinction is important because the latter does not include management fees, transaction costs, and financing. From here it's easy to see how an index fund might beat the market.
    - VLM 11y ago
      The article and discussion confound indexes with markets with sector investment strategies. The SP500 is not the market or even a market, its a small sector selected by backwards view of the recent past top 500 large caps. So buying an index fund that tracks SP500 means some churn as previously successful large companies are added, and recently unsuccessful large companies are removed. A trivial example of SP500 beating the market (of all stocks) would be new regulations or whatever resulting in increased costs and harm to small cap stocks. Its not hard to imagine... a fixed cost of regulation that might shut down your local independent gas station might be a rounding error at BP. Imagine an accounting change that costs the same to implement no matter if you're talking about thousands or billions. Or PCI/DSS change. Anyway in that situation the small caps would drag down the market average but have no effect on the large caps in SP500, so the SP500 "would beat the market" easily.
amsilprotag 11y ago
He's also identified the narrative as a popular excuse among the poorest-performing hedge funds ("We valued the stocks properly, it is the market that is wrong." and "We aren't even trying to beat the market, we are merely offering a different risk proposition.") After over a decade of data, hedge funds must compete against the more compelling narrative, that hedge fund winning streaks are a matter of chance, and that the average investor isn't capable of picking one with prolonged better-than-market returns.
- dsacco 11y ago
  >> hedge fund winning streaks are a matter of chance... Hedge fund winning streaks are not a matter of chance, they are just extremely difficult to pull off. In practice these two things appear similar; in theory they mean entirely different things about the market.
  - adrianN 11y ago
    If the market is reasonably efficient, I don't see how there can be a strategy that beats the market forever. But I'm also not an economist.
    - dsacco 11y ago
      Successful hedge funds don't use static strategies over a significant period of time. Instead, they are very good at developing new strategies. Thus, it's not the hedge funds' strategies that need to be consistent, it's their R&D.
  - jabv 11y ago
    Thank you. An important distinction. The same idea gets me going in discussions about turnover rates among football teams. (Teams tend to regress to the mean year-over-year in how often they fumble, so some writers insist fumbles are "caused" by chance.)
  - justincormack 11y ago
    That is hard to prove, and is also not necessarily useful for anyone making a choice of where to invest, if the rare events are pretty unpredictable and "pretty hard to pull off" they may as well be treated as random by investors. There clearly are strategies that make money at times. The majority off hedge funds do not offer these, and what they offer is hidden by their fees, which do not correspond to results, and even discourage good results as they encourage volatility.
brownbat 11y ago
On the other hand, the first couple sections here seem almost like a direct takedown of the New Yorker article: http://www.bloombergview.com/articles/2016-03-11/passive-investors-and-insider-traders http://www.bloombergview.com/articles/2016-03-11/passive-inv... Maybe his views have solidified in favor of passive investing. Either way though, balanced or skeptical, I trust Levine.

JoshTriplett 11y ago

There are always profits, and losses, to be had through attempting to beat the market. The trick is whether anyone can consistently beat the market, time and time again, such that their long-term return reliably exceeds that of the market itself. For that, I'd refer to http://longbets.org/362/ http://longbets.org/362/ .

n72 11y ago
The point is is that it becomes easier to beat the market the more people are indexing. Thus there become more people consistently beating the market. Identification of such is still an issue, but not as difficult.
- tosseraccount 11y ago
  How Many Mutual Funds Routinely Rout the Market? zero. "Look more closely at those gaudy returns, however, and you may see something startling. The truth is that very few professional investors have actually managed to outperform the rising market consistently over those years. In fact, based on the updated findings and definitions of a particular study, it appears that no mutual fund managers have." http://www.nytimes.com/2015/03/15/your-money/how-many-mutual-funds-routinely-rout-the-market-zero.html http://www.nytimes.com/2015/03/15/your-money/how-many-mutual...
  - hkmurakami 11y ago
    At this point, Mutual Funds are the bottom of the barrel with respect to attracting talent for active management. There are plenty of examples of active funds that have consistently beat the market. ex: Since Horseman's inception in February 2001, the fund has achieved annualized returns of 14.79%, according to HSBC. http://www.bloomberg.com/news/articles/2016-01-06/horseman-clark-s-love-of-losers-powers-20-gain-in-hedge-fund http://www.bloomberg.com/news/articles/2016-01-06/horseman-c...
    - tosseraccount 11y ago
      This fund? https://hedgefundranks.com/fund/909 https://hedgefundranks.com/fund/909
      - hkmurakami 11y ago
        seems to match up. http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2016/01/horseman%202.jpg http://www.zerohedge.com/sites/default/files/images/user5/im...
    - ericd 11y ago
      According to A Random Walk Down Wall Street, there are many examples of funds that have consistently beat the market over 5-10 years, but there are very few that outperform the market over a longer time horizon, and oftentimes they underperforming in the subsequent time periods (Peter Lynch's Magellan fund is the one counterexample given).
  - n72 11y ago
    I'm as big a boglehead as there is. Nevertheless, imagine you're the only person in the world not indexing. It's going to be quite easy to beat the market. Everyone else in existence is using market cap as the sole criterion for determining where to put their money. In this case all the other indicators for success are being ignored and not priced into the current price of the stock. In other words, if the whole world indexes the market becomes very inefficient.
AnthonyMouse 11y ago
> There are always profits, and losses, to be had through attempting to beat the market. In this context the problem is that buying into an index fund does beat the market, because it simultaneously creates and then takes advantage of a bubble in the price of stocks in the index. The price of indexed stocks goes up because index funds are buying them. Then people buy into index funds because they're going up. In theory non-index investors will then sell the indexed stocks once they're overpriced, but they can see the feedback loop. If more people are expected to invest in index funds in the future then the future demand for indexed shares will be even higher and the indexed shares will be worth even more tomorrow, so they become part of the bubble instead of correcting it.
- simo7 11y ago
  > an index fund does beat the market market = index fund (S&P 500 based). How can an index fund beat the market, if an index fund IS the market?
  - vostok 11y ago
    An index fund is not its index. The distinction is important because the latter does not include management fees, transaction costs, and financing. From here it's easy to see how an index fund might beat the market.
  - VLM 11y ago
    The article and discussion confound indexes with markets with sector investment strategies. The SP500 is not the market or even a market, its a small sector selected by backwards view of the recent past top 500 large caps. So buying an index fund that tracks SP500 means some churn as previously successful large companies are added, and recently unsuccessful large companies are removed. A trivial example of SP500 beating the market (of all stocks) would be new regulations or whatever resulting in increased costs and harm to small cap stocks. Its not hard to imagine... a fixed cost of regulation that might shut down your local independent gas station might be a rounding error at BP. Imagine an accounting change that costs the same to implement no matter if you're talking about thousands or billions. Or PCI/DSS change. Anyway in that situation the small caps would drag down the market average but have no effect on the large caps in SP500, so the SP500 "would beat the market" easily.

amsilprotag 11y ago

He's also identified the narrative as a popular excuse among the poorest-performing hedge funds ("We valued the stocks properly, it is the market that is wrong." and "We aren't even trying to beat the market, we are merely offering a different risk proposition.") After over a decade of data, hedge funds must compete against the more compelling narrative, that hedge fund winning streaks are a matter of chance, and that the average investor isn't capable of picking one with prolonged better-than-market returns.

dsacco 11y ago
>> hedge fund winning streaks are a matter of chance... Hedge fund winning streaks are not a matter of chance, they are just extremely difficult to pull off. In practice these two things appear similar; in theory they mean entirely different things about the market.
- adrianN 11y ago
  If the market is reasonably efficient, I don't see how there can be a strategy that beats the market forever. But I'm also not an economist.
  - dsacco 11y ago
    Successful hedge funds don't use static strategies over a significant period of time. Instead, they are very good at developing new strategies. Thus, it's not the hedge funds' strategies that need to be consistent, it's their R&D.
- jabv 11y ago
  Thank you. An important distinction. The same idea gets me going in discussions about turnover rates among football teams. (Teams tend to regress to the mean year-over-year in how often they fumble, so some writers insist fumbles are "caused" by chance.)
- justincormack 11y ago
  That is hard to prove, and is also not necessarily useful for anyone making a choice of where to invest, if the rare events are pretty unpredictable and "pretty hard to pull off" they may as well be treated as random by investors. There clearly are strategies that make money at times. The majority off hedge funds do not offer these, and what they offer is hidden by their fees, which do not correspond to results, and even discourage good results as they encourage volatility.

brownbat 11y ago

On the other hand, the first couple sections here seem almost like a direct takedown of the New Yorker article: http://www.bloombergview.com/articles/2016-03-11/passive-investors-and-insider-traders http://www.bloombergview.com/articles/2016-03-11/passive-inv... Maybe his views have solidified in favor of passive investing. Either way though, balanced or skeptical, I trust Levine.