5 ms·

> In a bad/recession year, this could be largely negative. They are not hedged against business cycle downturns. This was the argument made by Protege Partners

by JamilD 10y ago

> In a bad/recession year, this could be largely negative. They are not hedged against business cycle downturns. This was the argument made by Protege Partners, when betting against Buffett in the great "index funds vs hedge funds" long bet [0]. It turns out that the index funds fared better — and they're mainly used for long-term investment, where the short-term macroeconomic ebbs don't have an impact on the overall return. Of course the variance on the active side will be higher, but there are as many losers as they are winners, and much of it is due to simple randomness. Unless you're confident that you know more than other investors (for many people, including myself, we probably don't [1]), index funds, or "hugely diversified portfolios" are the way to go. Basically, no hedge fund is making those 200% returns you're speaking of, and even if some fund were, empirically it's more likely to be just noise. Look at the result so far of Buffett's bet on hedge funds. It speaks volumes. [0] http://longbets.org/362/ http://longbets.org/362/ [1] https://en.m.wikipedia.org/wiki/Dunning%E2%80%93Kruger_effect https://en.m.wikipedia.org/wiki/Dunning%E2%80%93Kruger_effec...

roymurdock 10y ago
I'm not trying to give investment advice, just explaining why you should be somewhat credulous about any sales pitch from a guy with vested interests in where you should put your money. It's not as simple as Buffett makes it seem.
- hueving 10y ago
  Buffets position is also backed by reality. On average, managed money will do worse because of the fees. The people making outsized returns are the minority. It's like going into a casino and arguing that the casino is losing because you see one guy hit a jackpot on the slot machine.
  - roymurdock 10y ago
    Again, I'm not advocating for one strategy over another, just pointing out that Buffett's explanation is simplistic and that it is worth considering metrics other than average returns.
    - 0xEFF 10y ago
      I mentioned this above, but I think you're missing the point. For what you suggest to be worth considering, you have to believe you're something other than an average investor. But you aren't. That's who he was speaking to and speaking about. Average investors.
      - soared 10y ago
        Hes not arguing managed makes more money, just that within hedge funds there is variation, where there is no variation within index. The both have the same avg, but wildly different max/min/etc
- 0xEFF 10y ago
  > It's not as simple as Buffett makes it seem. Yes, actually, it is. That's the whole point.
  - meric 10y ago
    No, it isn't. If everyone in the room were passive investors, and a company like GM starts losing money quarter after quarter, the passive investors will not sell GM. The company will continue to maintain the same stock price. They will continue to issue stock to cover their losses. Issuing stock increases market capitalisation, passive investors will buy in, and keep giving the company cash. On the other hand, new companies will have no active investors looking at them. No active investors to issue IPO's to. The economy will stagnate. Eventually the entire portfolio the room holds will be money losing companies, burning up the country's capital. The half of the room who are active investors contribute greatly to the economy's long term growth. They could either have negative long run returns as passive investors, or positive long run returns that are less than passive investors.
    - jganetsk 10y ago
      This analysis is dead-wrong. Passive investors will sell GM, not buy in. Index funds are weighted by capitalization. So whether GM's capitalization goes up or not is actually irrelevant: what's relevant is the ratio of its capitalization to the size of the total capitalization of all companies in the market, and how that changes. Setting that point aside, here's some basic math that shows why this analysis is completely wrong and why GM's market cap will go down. Let's say today, I am the CEO of GM, and I issued 1 million new shares, bringing the total up to 1 Billion outstanding shares. I dump them on the market, when the price was $50. The price drops some amount, because shares are being sold. How much money did I, as CEO of GM, raise? At most $50 million How much could market cap possibly have gone up? Exactly the amount that was raised: at most $50 million How much could market cap possibly have gone down? Drop in stock price * 1 Billion So market cap increase is precisely equal to the amount of capital provided by investors, which is finite and won't run away into a vicious cycle as suggested by the poster. Market cap decrease can be... well... 100%, all the way to zero. And the more shares issued, the more downward pressure on market cap... as the effect of crossing the bid-ask spread on market capitalization gets amplified.
iofj 10y ago
Keep in mind that both have the same disadvantage. It is certainly possible (and getting much easier in the last decade) to pick times when passive investing was essentially a worthless proposition (e.g. Sep 2000 up to now yielded <2% per year. Doing better would have been easy, even if you got bitten by the crash. Buying and holding almost any asset would have beaten it (a house, gold, ...). By contrast, starting in March 2003 would have yielded 7.5% per year, which would be pretty hard to beat over that time period). Truth is that the starting time of an investment determines your results far more than whether you pick active or passive investing. Word of warning: on a long term graph, today does not look like a good time to start investing, in fact looks like a really good time to sell and stay on the sidelines. This is not affected by passive vs active investing.
- e12e 10y ago
  > Word of warning: on a long term graph, today does not look like a good time to start investing, in fact looks like a really good time to sell and stay on the sidelines. This is not affected by passive vs active investing. Could you expand on what you mean here? Do you mean, that for every day, "today does not look like a good time to start", or do you mean that on this May 4th, 2016, you expect that investments made today, will seem like a bad investment on May 4th 2066? (Or whatever is considered a "long term graph")?
  - iofj 10y ago
    I mean nothing more than that if you were to put the S&P 500 graph over the last 15 years and extremely naively look at it, you'd conclude it was very high at the moment. Naively it would seem that it will see 1600 before it sees, say 2500. Also if you look at long term history you'd conclude something similar : the US has had a very long (if somewhat disappointing) economic recovery since 2008. We're due a bust. And finally, the playbook from earlier recessions does appear to be unfolding : manufacturing production has dropped by a lot, and services has flatlined. This is very much like the start of previous recessions. Next up is bad loans to commodity producers (ie. miners) and manufacturers actually going bad (meaning banks declaring losses), then a few defaults, then panic, then recovery. I would expect index investments made today will seem like bad investments in 10 years. I would never dream of predicting 50 years out. To be fair, I would have told you the same a year ago (not about the recession playbook, but probably everything else listed in this post).

by JamilD 10y ago

roymurdock 10y ago

I'm not trying to give investment advice, just explaining why you should be somewhat credulous about any sales pitch from a guy with vested interests in where you should put your money. It's not as simple as Buffett makes it seem.

hueving 10y ago
Buffets position is also backed by reality. On average, managed money will do worse because of the fees. The people making outsized returns are the minority. It's like going into a casino and arguing that the casino is losing because you see one guy hit a jackpot on the slot machine.
- roymurdock 10y ago
  Again, I'm not advocating for one strategy over another, just pointing out that Buffett's explanation is simplistic and that it is worth considering metrics other than average returns.
  - 0xEFF 10y ago
    I mentioned this above, but I think you're missing the point. For what you suggest to be worth considering, you have to believe you're something other than an average investor. But you aren't. That's who he was speaking to and speaking about. Average investors.
    - soared 10y ago
      Hes not arguing managed makes more money, just that within hedge funds there is variation, where there is no variation within index. The both have the same avg, but wildly different max/min/etc
0xEFF 10y ago
> It's not as simple as Buffett makes it seem. Yes, actually, it is. That's the whole point.
- meric 10y ago
  No, it isn't. If everyone in the room were passive investors, and a company like GM starts losing money quarter after quarter, the passive investors will not sell GM. The company will continue to maintain the same stock price. They will continue to issue stock to cover their losses. Issuing stock increases market capitalisation, passive investors will buy in, and keep giving the company cash. On the other hand, new companies will have no active investors looking at them. No active investors to issue IPO's to. The economy will stagnate. Eventually the entire portfolio the room holds will be money losing companies, burning up the country's capital. The half of the room who are active investors contribute greatly to the economy's long term growth. They could either have negative long run returns as passive investors, or positive long run returns that are less than passive investors.
  - jganetsk 10y ago
    This analysis is dead-wrong. Passive investors will sell GM, not buy in. Index funds are weighted by capitalization. So whether GM's capitalization goes up or not is actually irrelevant: what's relevant is the ratio of its capitalization to the size of the total capitalization of all companies in the market, and how that changes. Setting that point aside, here's some basic math that shows why this analysis is completely wrong and why GM's market cap will go down. Let's say today, I am the CEO of GM, and I issued 1 million new shares, bringing the total up to 1 Billion outstanding shares. I dump them on the market, when the price was $50. The price drops some amount, because shares are being sold. How much money did I, as CEO of GM, raise? At most $50 million How much could market cap possibly have gone up? Exactly the amount that was raised: at most $50 million How much could market cap possibly have gone down? Drop in stock price * 1 Billion So market cap increase is precisely equal to the amount of capital provided by investors, which is finite and won't run away into a vicious cycle as suggested by the poster. Market cap decrease can be... well... 100%, all the way to zero. And the more shares issued, the more downward pressure on market cap... as the effect of crossing the bid-ask spread on market capitalization gets amplified.

iofj 10y ago

Keep in mind that both have the same disadvantage. It is certainly possible (and getting much easier in the last decade) to pick times when passive investing was essentially a worthless proposition (e.g. Sep 2000 up to now yielded <2% per year. Doing better would have been easy, even if you got bitten by the crash. Buying and holding almost any asset would have beaten it (a house, gold, ...). By contrast, starting in March 2003 would have yielded 7.5% per year, which would be pretty hard to beat over that time period). Truth is that the starting time of an investment determines your results far more than whether you pick active or passive investing. Word of warning: on a long term graph, today does not look like a good time to start investing, in fact looks like a really good time to sell and stay on the sidelines. This is not affected by passive vs active investing.

e12e 10y ago
> Word of warning: on a long term graph, today does not look like a good time to start investing, in fact looks like a really good time to sell and stay on the sidelines. This is not affected by passive vs active investing. Could you expand on what you mean here? Do you mean, that for every day, "today does not look like a good time to start", or do you mean that on this May 4th, 2016, you expect that investments made today, will seem like a bad investment on May 4th 2066? (Or whatever is considered a "long term graph")?
- iofj 10y ago
  I mean nothing more than that if you were to put the S&P 500 graph over the last 15 years and extremely naively look at it, you'd conclude it was very high at the moment. Naively it would seem that it will see 1600 before it sees, say 2500. Also if you look at long term history you'd conclude something similar : the US has had a very long (if somewhat disappointing) economic recovery since 2008. We're due a bust. And finally, the playbook from earlier recessions does appear to be unfolding : manufacturing production has dropped by a lot, and services has flatlined. This is very much like the start of previous recessions. Next up is bad loans to commodity producers (ie. miners) and manufacturers actually going bad (meaning banks declaring losses), then a few defaults, then panic, then recovery. I would expect index investments made today will seem like bad investments in 10 years. I would never dream of predicting 50 years out. To be fair, I would have told you the same a year ago (not about the recession playbook, but probably everything else listed in this post).