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I had assumed - perhaps incorrectly - that as more and more money is invested in index funds and similar passive vehicles, it becomes increasing easy to beat th
by gabemart 9y ago
I had assumed - perhaps incorrectly - that as more and more money is invested in index funds and similar passive vehicles, it becomes increasing easy to beat the market as an active trader.
My thinking goes like this - as less money in invested actively, the market becomes less efficient at pricing. As the market becomes less efficient at pricing, it becomes easier to make money as an active trader. As it becomes easier to make money as an active trader, more money is invested actively, and the market becomes more efficient at pricing.
I may be using "active trading" incorrectly -- I just mean any kind of non-passive trading, both long and short term. But presumably, any kind of active trading theoretically increases the pricing efficiency of the market?
- bsder 9y agoHFT is very efficient. Individuals will simply not beat HFT unless they actually have insider information.
- Shounak 9y agoI believe the comment was talking about any kind of active trading (i.e. picking individual stocks to buy and sell), not only HFT, which uses millisecond fluctuations in security price to make a profit.
- atemerev 9y agoHFT doesn't need price fluctuations (though they are used if necessary). It is mostly about capturing spread and rebates.
- pedrocr 9y agoYour intuition seems correct but with a big caveat. If you divide the market in two, active to one side and passive to the other, both of them will have the exact same returns as a group. That's because all the passive investor is doing is replicating the market average and not changing it so the mix of stocks the total passive investors hold is the same as the mix of stocks the total active investors hold. That means as more money gets invested in index funds pricing becomes worse and thus there are more active funds that make a lot of money and more active funds that lose a lot of money and on average they still make the same returns before fees than the passive funds. It only stops being like this if pricing gets so poor that active funds can start to trade in ways that the passive funds can't replicate, either because they're faster or more frequent or have some other trading advantage that makes it very hard for the passive fund to replicate it effectively.
- rsync 9y ago"My thinking goes like this - as less money in invested actively, the market becomes less efficient at pricing." Wouldn't it be that the market becomes as efficient at pricing as the accuracy of index inclusion ? That is, we have replaced the widely varying performance and heuristics of active stock pickers with the more formulaic S&P 500 pickers ? Presumably that's a lot more efficient, but I suspect there is room for errors and games in index inclusion ...
- kgwgk 9y agoWhat do you mean by "pricing"? If there were only passive investors in the market, all the stocks would move together. Apple could announce that the next iPhone will be delayed until 2020 or Google could discover how to get energy from water and there would be no reaction in their stock price.