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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/per

by 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.
    - tabeth 9y ago
      OK, but what about the (many) hedge funds that are volatile? There are indeed funds that are better than index funds, but they're inaccessible to the average person, and therefore irrelevant.
      - opportune 9y ago
        You're right, there are volatile hedge funds, although it might be accurate to say that there are more and less volatile funds than indices. Moreover, there are plenty of bad funds that only exist to dupe clueless retail investors into giving them their money. I wouldn't say that all hedge funds are good, and in fact regular people are probably screwed when it comes to picking a good one (in part because some hedge funds are what I like to call "20/20 funds" and are just statistical testaments to the fact that some fraction of poorly managed funds will still do well). Volatility isn't a binary thing. Although the less-volatile more-return funds are out of reach for regular people, the less-volatile less-return funds are not, and these still have a lot of value for people who are less tolerant of risk.
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.

by Meekro 9y ago

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.
  - tabeth 9y ago
    OK, but what about the (many) hedge funds that are volatile? There are indeed funds that are better than index funds, but they're inaccessible to the average person, and therefore irrelevant.
    - opportune 9y ago
      You're right, there are volatile hedge funds, although it might be accurate to say that there are more and less volatile funds than indices. Moreover, there are plenty of bad funds that only exist to dupe clueless retail investors into giving them their money. I wouldn't say that all hedge funds are good, and in fact regular people are probably screwed when it comes to picking a good one (in part because some hedge funds are what I like to call "20/20 funds" and are just statistical testaments to the fact that some fraction of poorly managed funds will still do well). Volatility isn't a binary thing. Although the less-volatile more-return funds are out of reach for regular people, the less-volatile less-return funds are not, and these still have a lot of value for people who are less tolerant of risk.

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.