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Perhaps it is fashionable to point that out where you live, but common wisdom I hear is "everybody should just use index funds", without stopping to ask what wo

by gizmo 10y ago

Perhaps it is fashionable to point that out where you live, but common wisdom I hear is "everybody should just use index funds", without stopping to ask what would happen if everybody actually did. Worldwide equities are 65 trillion or so. Can you have a functioning stock market if 1T of that is actively managed by prop traders and the remaining 64T is in passive index funds? I'm not so sure.

tptacek 10y ago
Now you're talking past me. It does not follow from the fact that active investment is necessary that people should invest with active investors. Again, fierce competition among active investors can --- and probably have --- created conditions where all the returns on active investing will go to (effectively) proprietary traders.
- gizmo 10y ago
  I don't think I'm talking past you -- your previous point was perfectly clear. You literally cannot have active investments if nobody invests with active investors or actively manages their funds themselves. This is tautological. So somebody has to invest with active investors, but Buffett is arguing it should be somebody else and not you. If 99.99% of all assets are locked up in buy-and-hold passive index funds the prop traders can't do anything when a stock is mispriced because they can only trade with the handful of active investors that remain. With 65 trillion in equities a handful of prop traders can jump high and low all they want but the markets won't budge if nobody is buying or selling. The index managers on the other hand will be able to move markets with a keystroke, because whenever they decide that one stock in the index has to be replaced by another all the index fund money blindly follows.
  - tptacek 10y ago
    Nobody has to invest money in prop shops for them to provide market inputs. There are some huge proprietary trading firms.
    - gizmo 10y ago
      Prop shops still have owners. They are the investors. There is no such thing as an investment without an investor.
      - tptacek 10y ago
        You're now litigating the literal definition of a prop trading firm. Nobody is arguing that you shouldn't start a prop trading firm. The argument is that you shouldn't invest in hedge funds, because passive investment funds outperform them. If you want to make money in active investment, join or form a prop firm. The broader point would be, the market can probably function based on passive investment and inputs from prop firms, without retail and institutional investors ever needing to engage in active investment. That would also be compatible with the notion that active trading is in general unprofitable because the profit is so aggressively competed out of it.
        wbl 10y ago
        No, join or start a hedge fund and take the fees from the investors. That's how you make money actively trading.
        tptacek 10y ago
        The whole point of this particular branch of the thread is that hedge funds underperform passive investors.
        wbl 10y ago
        Not if you are the one collecting the fees.
        gizmo 10y ago
        I literally made this point earlier. I even used the word literally to indicate I meant it literally. > Nobody is arguing that you shouldn't start a prop trading firm. I disagree. People are absolutely arguing that nobody should start a prop firm because you can't beat the market. That the prop funds that succeed are just those that have gotten lucky in the short term. That everybody should put their money in index funds instead. I know you don't believe this, but it's a common belief for sure. I think that if all retail investors and all institutional investors exclusively invest in passive funds the market will get out of whack. We're talking about all pension funds, university endowments, private trusts, all moving to index funds. All households together own about 80% of the stock market (direct + indirect ownership). Hedge funds another 4%. Prop trading firms probably less than 1%. There are over 3500 publicly listed US equities and another 10,000 OTC. Deep analysis on every equity is needed to determine if it is fairly valued; no way prop firms can take on this gargantuan task by themselves. Not to mention that index funds are long-only. Very few hedge funds are. If almost everybody moved to index funds the long-only bias by itself could be disastrous.

by gizmo 10y ago

tptacek 10y ago

Now you're talking past me. It does not follow from the fact that active investment is necessary that people should invest with active investors. Again, fierce competition among active investors can --- and probably have --- created conditions where all the returns on active investing will go to (effectively) proprietary traders.

gizmo 10y ago
I don't think I'm talking past you -- your previous point was perfectly clear. You literally cannot have active investments if nobody invests with active investors or actively manages their funds themselves. This is tautological. So somebody has to invest with active investors, but Buffett is arguing it should be somebody else and not you. If 99.99% of all assets are locked up in buy-and-hold passive index funds the prop traders can't do anything when a stock is mispriced because they can only trade with the handful of active investors that remain. With 65 trillion in equities a handful of prop traders can jump high and low all they want but the markets won't budge if nobody is buying or selling. The index managers on the other hand will be able to move markets with a keystroke, because whenever they decide that one stock in the index has to be replaced by another all the index fund money blindly follows.
- tptacek 10y ago
  Nobody has to invest money in prop shops for them to provide market inputs. There are some huge proprietary trading firms.
  - gizmo 10y ago
    Prop shops still have owners. They are the investors. There is no such thing as an investment without an investor.
    - tptacek 10y ago
      You're now litigating the literal definition of a prop trading firm. Nobody is arguing that you shouldn't start a prop trading firm. The argument is that you shouldn't invest in hedge funds, because passive investment funds outperform them. If you want to make money in active investment, join or form a prop firm. The broader point would be, the market can probably function based on passive investment and inputs from prop firms, without retail and institutional investors ever needing to engage in active investment. That would also be compatible with the notion that active trading is in general unprofitable because the profit is so aggressively competed out of it.
      - wbl 10y ago
        No, join or start a hedge fund and take the fees from the investors. That's how you make money actively trading.
        tptacek 10y ago
        The whole point of this particular branch of the thread is that hedge funds underperform passive investors.
        wbl 10y ago
        Not if you are the one collecting the fees.
      - gizmo 10y ago
        I literally made this point earlier. I even used the word literally to indicate I meant it literally. > Nobody is arguing that you shouldn't start a prop trading firm. I disagree. People are absolutely arguing that nobody should start a prop firm because you can't beat the market. That the prop funds that succeed are just those that have gotten lucky in the short term. That everybody should put their money in index funds instead. I know you don't believe this, but it's a common belief for sure. I think that if all retail investors and all institutional investors exclusively invest in passive funds the market will get out of whack. We're talking about all pension funds, university endowments, private trusts, all moving to index funds. All households together own about 80% of the stock market (direct + indirect ownership). Hedge funds another 4%. Prop trading firms probably less than 1%. There are over 3500 publicly listed US equities and another 10,000 OTC. Deep analysis on every equity is needed to determine if it is fairly valued; no way prop firms can take on this gargantuan task by themselves. Not to mention that index funds are long-only. Very few hedge funds are. If almost everybody moved to index funds the long-only bias by itself could be disastrous.