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If it's just stock-picking as opposed to getting access to a wider variety of investments, then it's very difficult for active stock picking to be worth anythin

If it's just stock-picking as opposed to getting access to a wider variety of investments, then it's very difficult for active stock picking to be worth anything. If stocks are owned just by stock-pickers and passive indexers, then they own the same stocks in the same proportion. The only thing active funds can do is invest in things that passive indexes don't, or better take advantage of the "dumb money". Things like high-frequency trading definitely count here. Pure stock-picking though? Yeah, anyone who outperforms is on the other side of trades that underperform, so you're going to run into issues.

guelo 9y ago
But the hedge funds in Buffet's bet did make those wider variety types of investments.
jonahx 9y ago
> Yeah, anyone who outperforms is on the other side of trades that underperform, so you're going to run into issues. True, but it's not like the bet is already decided because of this mathematical fact. In theory the good pickers can predict the outperformers. It's a surprising claim that this is, essentially, not possible -- or at least only marginally possible to a degree that's cancelled out by fees.
- ThrustVectoring 9y ago
  If you average together a lot of stock pickers, you wind up with roughly a market-cap weighted index. If you average together everyone who holds stock, you wind up with exactly the market-cap weighted index.
  - jonahx 9y ago
    Right. But it's still surprising that "experts" can't make a biased selection that is better than the exact average. On average, basketball teams in the NBA score X points per game. You now get to pick 5 teams and average just their scores. I'd imagine in that situation it's pretty easy to beat the league average. Again, it's a surprising and non-trivial fact that this isn't the case in the stock market, roughly speaking.
    - munchbunny 9y ago
      That's not entirely the nuance of Warren Buffet's argument though. His argument is that the stock pickers have the deck stacked against them on total returns to the investor due to high fees. So maybe they do actually do better than average, but that it's likely not "2 and 20" better.
      - jonahx 9y ago
        See my post above the one you replied to.

guelo 9y ago

But the hedge funds in Buffet's bet did make those wider variety types of investments.

jonahx 9y ago

> Yeah, anyone who outperforms is on the other side of trades that underperform, so you're going to run into issues. True, but it's not like the bet is already decided because of this mathematical fact. In theory the good pickers can predict the outperformers. It's a surprising claim that this is, essentially, not possible -- or at least only marginally possible to a degree that's cancelled out by fees.

ThrustVectoring 9y ago
If you average together a lot of stock pickers, you wind up with roughly a market-cap weighted index. If you average together everyone who holds stock, you wind up with exactly the market-cap weighted index.
- jonahx 9y ago
  Right. But it's still surprising that "experts" can't make a biased selection that is better than the exact average. On average, basketball teams in the NBA score X points per game. You now get to pick 5 teams and average just their scores. I'd imagine in that situation it's pretty easy to beat the league average. Again, it's a surprising and non-trivial fact that this isn't the case in the stock market, roughly speaking.
  - munchbunny 9y ago
    That's not entirely the nuance of Warren Buffet's argument though. His argument is that the stock pickers have the deck stacked against them on total returns to the investor due to high fees. So maybe they do actually do better than average, but that it's likely not "2 and 20" better.
    - jonahx 9y ago
      See my post above the one you replied to.