5 ms·

I'm fascinated at how Vanguard's essential idea plays out over the long term. The basic value proposition seems to be that Wall Street is extracting more value

I'm fascinated at how Vanguard's essential idea plays out over the long term. The basic value proposition seems to be that Wall Street is extracting more value in fees than they're making in smart stock picks. Which thus far has been pretty accurate, but is the contribution of stock pickers actually zero? Is it negative? Where do we reach a fixpoint, and how? Do the stock pickers, clever scamps that they are, figure out a way to take advantage of the Bogleheads and their naivete? Are they already doing so? Is this going to turn the stock market into just one big house of cards? I mean, don't get me wrong, I absolutely buy that Wall Street is a bunch of crooks-- it's a hell of a lot easier to extract fees from your customers than it is to beat a market full of highly motivated Ivy Leauge MBAs. But where does it stop? If I've seen any trends in the financial markets, it's that every good idea will eventually be flogged to death, usually with catastrophic results.

kirrent 9y ago
I've read people who theorise that as index funds grow larger their shortcomings increases the rewards for more active traders who now have more opportunities available that aren't being taken advantage of by those index funds, no matter how closely and quickly they track a given index. Presumably that theory would lead to some equilibrium between the two investing styles.
- warcher 9y ago
  I'm crossing my fingers for the ol invisible hand evening this whole thing out-- Wall Street takes a haircut on fees until they reach pricing equilibrium. It's not like financial analysts are without value. I just don't know if they deliver the value they extract. Bogle made a pretty compelling argument that they do not. Is there a doomsday scenario, haha?
lz400 9y ago
I think a few stock pickers are really good at their jobs while a lot of others are mediocre to plain bad. The problem is that the ones that are consistently good are usually boutique hedge funds not open for normal people, some of them like Renaissance Tech only invest their own money and take no external funds anymore. Part of this is that their edge only works if their moves don't alter the market too much and for that there's a limit to how much money they can manage. But at the end of the day if you are not a rich investor with access to stuff like that I wouldn't be surprised if chances are an index fund is going to outperform most stuff Wall Street might try to sell you.
- warcher 9y ago
  The real dangerous issue, as I see it, is good pickers trading on their edge for increased fees, because presumably they're pretty smart and can justify them based on past performance. But if the edge goes away.... you're still stuck with the fees. Caveat emptor. Dunno. Maybe the wealthy have access to wonderful investments we don't; I certainly wouldn't know.
  - sigstoat 9y ago
    can't be sure about the wonderful part, but otherwise, yes, there are plenty of investment opportunities available to the "wealthy" that others are generally not allowed: http://www.investopedia.com/terms/a/accreditedinvestor.asp http://www.investopedia.com/terms/a/accreditedinvestor.asp
skybrian 9y ago
You might want to consider the boring scenario: maybe there are fewer professional traders, but their computer models improve, so prices get set as efficiently as before and maybe better.
- warcher 9y ago
  Always hiring for my chosen profession: horseman of the apocalypse. Sorry analysts; it was your turn I guess.
mikekchar 9y ago
This may sound snarky, but it's not meant to be. When I've worked in large corporations I was astounded by the amount of... shall we say "irregular" stock activity. For a while I've been struck with the thought that you could probably make a pretty good living simply buying long stock the day before executive stock options are issued and then selling them again when executives are selling theirs (either through planned trades or when blackouts are lifted). Interestingly (for me, anyway) the very large places I've worked at often let the peons listen to the analysts meetings over the phone system. Again, I was shocked by the complete lack of knowledge that analysts at big investment houses have in the companies they were analysing. They would be completely unaware of large acquisitions, law suits and any number of things that even the casual observer would know about. I really got the impression that their job was literally to attend the meeting and report the company's projections. The company's could get away with murder because nobody was paying attention to what they were doing. Not sure if things have tightened up since that time in my life. I haven't worked for a big company since the early 2000's, but somehow I get the impression that there are probably plenty of ways to ride on the coattails of less than scrupulous executive compensation.
- Frqy3 9y ago
  I have an engineering background and worked with a major telco for several years before moving to work as a financial analyst for a while. Few of the other analysts had an industry background in the companies they covered. Mostly they had an accounting/commerce/economics background. They were good at pulling together financial models from the data and information provided to them in briefings, but they largely missed the implications that even someone with a year or two of industry experience would understand. I am reminded of the story of Max Planck and the chauffeur and the two types of knowledge [0]. [0] https://www.farnamstreetblog.com/2015/09/two-types-of-knowledge/ https://www.farnamstreetblog.com/2015/09/two-types-of-knowle...
- uiri 9y ago
  Was this before or after the large Enron scandal? One would hope that things have been tightened up since then and tightened even further on the aftermath of the late 00s financial meltdown but maybe they haven't been.
lmm 9y ago
> Which thus far has been pretty accurate, but is the contribution of stock pickers actually zero? Is it negative? Net of fees, probably. There's a certain amount of value contributed to the real economy by accurate stock prices, and a certain amount of that is created by reading the news, being aware of industry trends, etc. But the number of people needed to do that efficiently gets smaller all the time. > Do the stock pickers, clever scamps that they are, figure out a way to take advantage of the Bogleheads and their naivete? Are they already doing so? Is this going to turn the stock market into just one big house of cards? It's smoother than that. The more people are indexing, the more profitable the various types of active investment become. There's an equilibrium to be reached. We're probably in for higher volativity than present, sure - but the present low volatility is a historical aberration. > If I've seen any trends in the financial markets, it's that every good idea will eventually be flogged to death, usually with catastrophic results. More like it will get flogged until there's no more money in it and it's just a boring utility, like has happened to HFT.
zellyn 9y ago
I saw an article the other day that argued that because of skewness caused by a few companies having outsized gains, the value of picking stocks is typically negative. Sorry - can't find the article right now :-(

kirrent 9y ago

I've read people who theorise that as index funds grow larger their shortcomings increases the rewards for more active traders who now have more opportunities available that aren't being taken advantage of by those index funds, no matter how closely and quickly they track a given index. Presumably that theory would lead to some equilibrium between the two investing styles.

warcher 9y ago
I'm crossing my fingers for the ol invisible hand evening this whole thing out-- Wall Street takes a haircut on fees until they reach pricing equilibrium. It's not like financial analysts are without value. I just don't know if they deliver the value they extract. Bogle made a pretty compelling argument that they do not. Is there a doomsday scenario, haha?

lz400 9y ago

I think a few stock pickers are really good at their jobs while a lot of others are mediocre to plain bad. The problem is that the ones that are consistently good are usually boutique hedge funds not open for normal people, some of them like Renaissance Tech only invest their own money and take no external funds anymore. Part of this is that their edge only works if their moves don't alter the market too much and for that there's a limit to how much money they can manage. But at the end of the day if you are not a rich investor with access to stuff like that I wouldn't be surprised if chances are an index fund is going to outperform most stuff Wall Street might try to sell you.

warcher 9y ago
The real dangerous issue, as I see it, is good pickers trading on their edge for increased fees, because presumably they're pretty smart and can justify them based on past performance. But if the edge goes away.... you're still stuck with the fees. Caveat emptor. Dunno. Maybe the wealthy have access to wonderful investments we don't; I certainly wouldn't know.
- sigstoat 9y ago
  can't be sure about the wonderful part, but otherwise, yes, there are plenty of investment opportunities available to the "wealthy" that others are generally not allowed: http://www.investopedia.com/terms/a/accreditedinvestor.asp http://www.investopedia.com/terms/a/accreditedinvestor.asp

skybrian 9y ago

You might want to consider the boring scenario: maybe there are fewer professional traders, but their computer models improve, so prices get set as efficiently as before and maybe better.

warcher 9y ago
Always hiring for my chosen profession: horseman of the apocalypse. Sorry analysts; it was your turn I guess.

mikekchar 9y ago

This may sound snarky, but it's not meant to be. When I've worked in large corporations I was astounded by the amount of... shall we say "irregular" stock activity. For a while I've been struck with the thought that you could probably make a pretty good living simply buying long stock the day before executive stock options are issued and then selling them again when executives are selling theirs (either through planned trades or when blackouts are lifted). Interestingly (for me, anyway) the very large places I've worked at often let the peons listen to the analysts meetings over the phone system. Again, I was shocked by the complete lack of knowledge that analysts at big investment houses have in the companies they were analysing. They would be completely unaware of large acquisitions, law suits and any number of things that even the casual observer would know about. I really got the impression that their job was literally to attend the meeting and report the company's projections. The company's could get away with murder because nobody was paying attention to what they were doing. Not sure if things have tightened up since that time in my life. I haven't worked for a big company since the early 2000's, but somehow I get the impression that there are probably plenty of ways to ride on the coattails of less than scrupulous executive compensation.

Frqy3 9y ago
I have an engineering background and worked with a major telco for several years before moving to work as a financial analyst for a while. Few of the other analysts had an industry background in the companies they covered. Mostly they had an accounting/commerce/economics background. They were good at pulling together financial models from the data and information provided to them in briefings, but they largely missed the implications that even someone with a year or two of industry experience would understand. I am reminded of the story of Max Planck and the chauffeur and the two types of knowledge [0]. [0] https://www.farnamstreetblog.com/2015/09/two-types-of-knowledge/ https://www.farnamstreetblog.com/2015/09/two-types-of-knowle...
uiri 9y ago
Was this before or after the large Enron scandal? One would hope that things have been tightened up since then and tightened even further on the aftermath of the late 00s financial meltdown but maybe they haven't been.

lmm 9y ago

> Which thus far has been pretty accurate, but is the contribution of stock pickers actually zero? Is it negative? Net of fees, probably. There's a certain amount of value contributed to the real economy by accurate stock prices, and a certain amount of that is created by reading the news, being aware of industry trends, etc. But the number of people needed to do that efficiently gets smaller all the time. > Do the stock pickers, clever scamps that they are, figure out a way to take advantage of the Bogleheads and their naivete? Are they already doing so? Is this going to turn the stock market into just one big house of cards? It's smoother than that. The more people are indexing, the more profitable the various types of active investment become. There's an equilibrium to be reached. We're probably in for higher volativity than present, sure - but the present low volatility is a historical aberration. > If I've seen any trends in the financial markets, it's that every good idea will eventually be flogged to death, usually with catastrophic results. More like it will get flogged until there's no more money in it and it's just a boring utility, like has happened to HFT.

zellyn 9y ago

I saw an article the other day that argued that because of skewness caused by a few companies having outsized gains, the value of picking stocks is typically negative. Sorry - can't find the article right now :-(