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Step -1: Read too much /r/personalfinance, come to believe the dogma that all investment is completely unpredictable, diversification is the ONLY possible way t

Step -1: Read too much /r/personalfinance, come to believe the dogma that all investment is completely unpredictable, diversification is the ONLY possible way to make money and that past results are a sure-fire indicator of the future. Preach your dogma as the one true answer to anyone who will listen.

FridgeSeal 9y ago
Alternative Step-1: Read /r/WallStreetBets, lose all your money in poorly planned, gung-ho margin trading adventures. :P
Meekro 9y ago
Top investor Warren Buffet agrees with this "dogma." He just won a bet that index funds would outperform hedge funds during 2007-2017. [1] Trust him, not /r/personalfinance. [1] https://www.cnbc.com/2018/01/03/why-warren-buffett-says-index-funds-are-the-best-investment.html https://www.cnbc.com/2018/01/03/why-warren-buffett-says-inde...
- hedora 9y ago
  I noticed that the stocks that ETFs and stock screening algorithms like moved had much higher correlation with the indexes during last week’s correction. This is just based on a quick spot check, but I’m worried the passive investment craze has weakened the link between business fundamentals and pricing for the stocks in the most popular indexes. If so, that increases correlations in the pricing of assets that were explicitly chosen because their prices have no or negative correlation with each other.
  - arcbyte 9y ago
    Check out https://heisenbergreport.com/ https://heisenbergreport.com/. Hes was talking about this last year a lot.
- dsacco 9y ago
  The advice to use index funds is sound and most people should follow it. But that “bet” is a very weak argument for it. Buffett bet against a particular hedge fund manager who as far as I can tell was only in it for the publicity. There are plenty of hedge funds which beat the market so significantly and so consistently over long timespans (even decades) that choosing any single one of them would have handily won the bet. But the bet was for a “fund of funds” approximately tracking the aggregate hedge fund industry, not any particular one. Buffett wouldn’t have taken a bet involving any of the single superlative funds because he understands this point already. The core thesis vindicated by that bet is simply this: most participants in the market don’t do well. You didn’t really need a public bet with a famous investor to prove this - the stats have been available for quite a while. Buffett obviously believes people can beat the market, or he wouldn’t be in the business he’s in. Therefore, the point stands. It’s dogmatic to act as though beating the market is impossible. It’s not necessarily advisable to try it because it’s quite difficult, but throwing around citations of Buffett’s bet don’t really improve honest education. Most people aren’t going to become pro athletes either, so you shouldn’t bank your future on it. But that doesn’t mean it’s impossible or that you can’t (responsibly) pursue it.
  - tabeth 9y ago
    This post is disingenuous. What percentage of hedge fund managers would beat an index fund? What percentage of people have access to said hedge funds? And even if you can beat the market, how much time, money and energy are you going to use to beat it? Taking into account the margins by which you may beat it by, is it worth it? Probably not for a single individual even thinking about this question. Common now.
    - opportune 9y ago
      Sure, an index fund may win over time, but part of what a hedge fund is supposed to do is to hedge against the market. A lot of hedge fund customers are pension funds, people close to retirement, etc. For these people, the long term health of fund is of course important, but they can't afford the volatility - if their investment loses 10% of its value in a year, they may not be able to make the payments or subsist on the income as much as they wished. As a result it's not really fair to compare the long term performance of a hedge fund with an index fund. Index funds are more aggressively invested and thus more volatile.
- beambot 9y ago
  Why doesn't Warren Buffett follow this strategy himself? Clearly there are other factors at play.
  - ceejayoz 9y ago
    Buffett is essentially following the strategy - a diversified portfolio of long-term value assets. He's able to beat the market in part because the mere hint of his involvement in a stock causes it's value to go up. You and I don't have that ability.
  - sobani 9y ago
    (copy from a comment I made half a year ago) "The way to become rich is to put all your eggs in one basket and then watch that basket." - Andrew Carnegie The way Buffett invests is by reading all day, everyday and once in a while making a very informed investment. Most people haven't even reached the level of staying away from 'sure things' and panic selling during bad news. How many people would've been able to stay away from IT stocks during the dotcom boom, to even not invest in the company of one of your friends. (Bill Gates and Buffett have known each other since '91) How often do you, as a 'master', break rules that you would tell a 'apprentice' are immutable?
- sfifs 9y ago
  Mr. Buffet has made his whole fortune beating the index. What he bet on was on average returns across hedge funds would be beaten by the index. Constituting this average will be some funds who make a lot of money for their investors consistently and some that lose money.
hunter23 9y ago
I think most behavioral finance people would agree 95% of Americans should follow this "dogma" because the biggest risk for them is making dumb speculative investments. The top 5% can approach investing with a more personalized strategy, but for most of us, esp. those who don't give a damn what a stock is, this advice is pretty sound.
- jjeaff 9y ago
  I would say more like less than 1% of us should make more complicated investments than index. And that is generous, considering that there are much fewer people than that in the US today that have made consistent money picking winners and losers. Almost anyone you know that makes a consistent living in the stock market is actually making money through commissions and management fees.
- opportune 9y ago
  The entire point of a hedge fund is to do this for people, for a fee. An index fund, on the other hand, is simply a direct purchase of stocks. 95% of Americans should not be blindly investing in indices because that would completely divorce the index constituents' valuations from their fundamentals - and as a result, when this is corrected, a lot of people would lose a lot of money.
opportune 9y ago
Diversification is obviously not the only possible way to make money, but it helps minimize risk, and I think your tone is a little unnecessarily mean However, you are right that the /r/personalfinance mantra of "S&P index or bust" is not actually good. In particular, as index funds become more popular in aggregate, they become worse investments, because they put continuous "buy pressure" on a select few stocks. Furthermore, the S&P isn't really diversified in that it only contains big cap stocks, afaik has no foreign stocks either (although of course many S&P businesses are global enterprises), and only has low exposure to industries like biotech. Also /r/pf does a poor job talking about non-stock investments. Sometimes a better investment might be to start your own business, purchase real estate, or bonds. If you have time you can research growth stocks (e.g. pharmaceutical companies undergoing FDA trials) and pick the promising ones. Even learning a skill is often the best investment possible for most people - /r/pf constantly says that you can use about 4% of your wealth as yearly income, so you'd think there would be more people trying to get better jobs, since that makes a $20,000/year raise approx. equivalent to $500,000.
- vobios 9y ago
  > you can research growth stocks (e.g. pharmaceutical companies undergoing FDA trials) and pick the promising ones Those FDA trials are expensive. Those companies have many experts in the field that believe those trials have a reasonable chance of success. Otherwise, they would not proceed with them. Even the FDA itself believes those trials have a good chance of success. There are plenty of Wall Street analysts who are also evaluating these trials. Regular Joe is not going to outsmart all those people.
  - opportune 9y ago
    Fair. But I meant that as an example - by research I was thinking of looking in depth at the drug and where it is in the pipeline, what it treats / the market the drug might enter, how promising its research looks, how similar drugs/analogues faired in FDA trials, etc. I wouldn't suggest someone with a poor background in chemistry or pharmaceuticals to try doing that - I think if you're looking at riskier companies, you should mostly only invest in what you know.
chrisbennet 9y ago
What did the noble laureate economist among others tell the Google employees before they came into their IPO wealth? Yep, the “dogma” http://ritholtz.com/2014/02/the-best-investment-advice-youll-never-get-2/ http://ritholtz.com/2014/02/the-best-investment-advice-youll... ”One by one, some of the most revered names in investment theory were brought in to school a class of brilliant engineers, programmers, and cybergeeks on the fine art of personal investing, something few of them had thought much about. First to arrive was Stanford University’s William (Bill) Sharpe, 1990 Nobel Laureate economist and professor emeritus of finance at the Graduate School of Business...”

FridgeSeal 9y ago

Alternative Step-1: Read /r/WallStreetBets, lose all your money in poorly planned, gung-ho margin trading adventures. :P

Meekro 9y ago

Top investor Warren Buffet agrees with this "dogma." He just won a bet that index funds would outperform hedge funds during 2007-2017. [1] Trust him, not /r/personalfinance. [1] https://www.cnbc.com/2018/01/03/why-warren-buffett-says-index-funds-are-the-best-investment.html https://www.cnbc.com/2018/01/03/why-warren-buffett-says-inde...

hedora 9y ago
I noticed that the stocks that ETFs and stock screening algorithms like moved had much higher correlation with the indexes during last week’s correction. This is just based on a quick spot check, but I’m worried the passive investment craze has weakened the link between business fundamentals and pricing for the stocks in the most popular indexes. If so, that increases correlations in the pricing of assets that were explicitly chosen because their prices have no or negative correlation with each other.
- arcbyte 9y ago
  Check out https://heisenbergreport.com/ https://heisenbergreport.com/. Hes was talking about this last year a lot.
dsacco 9y ago
The advice to use index funds is sound and most people should follow it. But that “bet” is a very weak argument for it. Buffett bet against a particular hedge fund manager who as far as I can tell was only in it for the publicity. There are plenty of hedge funds which beat the market so significantly and so consistently over long timespans (even decades) that choosing any single one of them would have handily won the bet. But the bet was for a “fund of funds” approximately tracking the aggregate hedge fund industry, not any particular one. Buffett wouldn’t have taken a bet involving any of the single superlative funds because he understands this point already. The core thesis vindicated by that bet is simply this: most participants in the market don’t do well. You didn’t really need a public bet with a famous investor to prove this - the stats have been available for quite a while. Buffett obviously believes people can beat the market, or he wouldn’t be in the business he’s in. Therefore, the point stands. It’s dogmatic to act as though beating the market is impossible. It’s not necessarily advisable to try it because it’s quite difficult, but throwing around citations of Buffett’s bet don’t really improve honest education. Most people aren’t going to become pro athletes either, so you shouldn’t bank your future on it. But that doesn’t mean it’s impossible or that you can’t (responsibly) pursue it.
- tabeth 9y ago
  This post is disingenuous. What percentage of hedge fund managers would beat an index fund? What percentage of people have access to said hedge funds? And even if you can beat the market, how much time, money and energy are you going to use to beat it? Taking into account the margins by which you may beat it by, is it worth it? Probably not for a single individual even thinking about this question. Common now.
  - opportune 9y ago
    Sure, an index fund may win over time, but part of what a hedge fund is supposed to do is to hedge against the market. A lot of hedge fund customers are pension funds, people close to retirement, etc. For these people, the long term health of fund is of course important, but they can't afford the volatility - if their investment loses 10% of its value in a year, they may not be able to make the payments or subsist on the income as much as they wished. As a result it's not really fair to compare the long term performance of a hedge fund with an index fund. Index funds are more aggressively invested and thus more volatile.
beambot 9y ago
Why doesn't Warren Buffett follow this strategy himself? Clearly there are other factors at play.
- ceejayoz 9y ago
  Buffett is essentially following the strategy - a diversified portfolio of long-term value assets. He's able to beat the market in part because the mere hint of his involvement in a stock causes it's value to go up. You and I don't have that ability.
- sobani 9y ago
  (copy from a comment I made half a year ago) "The way to become rich is to put all your eggs in one basket and then watch that basket." - Andrew Carnegie The way Buffett invests is by reading all day, everyday and once in a while making a very informed investment. Most people haven't even reached the level of staying away from 'sure things' and panic selling during bad news. How many people would've been able to stay away from IT stocks during the dotcom boom, to even not invest in the company of one of your friends. (Bill Gates and Buffett have known each other since '91) How often do you, as a 'master', break rules that you would tell a 'apprentice' are immutable?
sfifs 9y ago
Mr. Buffet has made his whole fortune beating the index. What he bet on was on average returns across hedge funds would be beaten by the index. Constituting this average will be some funds who make a lot of money for their investors consistently and some that lose money.

hunter23 9y ago

I think most behavioral finance people would agree 95% of Americans should follow this "dogma" because the biggest risk for them is making dumb speculative investments. The top 5% can approach investing with a more personalized strategy, but for most of us, esp. those who don't give a damn what a stock is, this advice is pretty sound.

jjeaff 9y ago
I would say more like less than 1% of us should make more complicated investments than index. And that is generous, considering that there are much fewer people than that in the US today that have made consistent money picking winners and losers. Almost anyone you know that makes a consistent living in the stock market is actually making money through commissions and management fees.
opportune 9y ago
The entire point of a hedge fund is to do this for people, for a fee. An index fund, on the other hand, is simply a direct purchase of stocks. 95% of Americans should not be blindly investing in indices because that would completely divorce the index constituents' valuations from their fundamentals - and as a result, when this is corrected, a lot of people would lose a lot of money.

opportune 9y ago

Diversification is obviously not the only possible way to make money, but it helps minimize risk, and I think your tone is a little unnecessarily mean However, you are right that the /r/personalfinance mantra of "S&P index or bust" is not actually good. In particular, as index funds become more popular in aggregate, they become worse investments, because they put continuous "buy pressure" on a select few stocks. Furthermore, the S&P isn't really diversified in that it only contains big cap stocks, afaik has no foreign stocks either (although of course many S&P businesses are global enterprises), and only has low exposure to industries like biotech. Also /r/pf does a poor job talking about non-stock investments. Sometimes a better investment might be to start your own business, purchase real estate, or bonds. If you have time you can research growth stocks (e.g. pharmaceutical companies undergoing FDA trials) and pick the promising ones. Even learning a skill is often the best investment possible for most people - /r/pf constantly says that you can use about 4% of your wealth as yearly income, so you'd think there would be more people trying to get better jobs, since that makes a $20,000/year raise approx. equivalent to $500,000.

vobios 9y ago
> you can research growth stocks (e.g. pharmaceutical companies undergoing FDA trials) and pick the promising ones Those FDA trials are expensive. Those companies have many experts in the field that believe those trials have a reasonable chance of success. Otherwise, they would not proceed with them. Even the FDA itself believes those trials have a good chance of success. There are plenty of Wall Street analysts who are also evaluating these trials. Regular Joe is not going to outsmart all those people.
- opportune 9y ago
  Fair. But I meant that as an example - by research I was thinking of looking in depth at the drug and where it is in the pipeline, what it treats / the market the drug might enter, how promising its research looks, how similar drugs/analogues faired in FDA trials, etc. I wouldn't suggest someone with a poor background in chemistry or pharmaceuticals to try doing that - I think if you're looking at riskier companies, you should mostly only invest in what you know.

chrisbennet 9y ago

What did the noble laureate economist among others tell the Google employees before they came into their IPO wealth? Yep, the “dogma” http://ritholtz.com/2014/02/the-best-investment-advice-youll-never-get-2/ http://ritholtz.com/2014/02/the-best-investment-advice-youll... ”One by one, some of the most revered names in investment theory were brought in to school a class of brilliant engineers, programmers, and cybergeeks on the fine art of personal investing, something few of them had thought much about. First to arrive was Stanford University’s William (Bill) Sharpe, 1990 Nobel Laureate economist and professor emeritus of finance at the Graduate School of Business...”