4 ms·

>the market on average (since the index funds are the average). This statement is potentially confusing because it depends on what the word "average" is refer

by jasode 8y ago

>the market on average (since the index funds are the average). This statement is potentially confusing because it depends on what the word "average" is referencing. If we're talking about _all_ investors's returns including active and passive investors, the S&P 500 index has historically provided above average returns[1]. The math allows the S&P 500 index to be above average because so many investors lose money. Think of the unsophisticated investors losing money on the bitcoin crash, or buying Snapchat at $27 last year and selling it today at $8, or trying naive strategies at day trading. And most mutual funds, hedge funds, and VC funds also provide lower returns than the S&P 500. All those money losers mathematically "bring the average down" such that the S&P500 ends up providing above average returns. This "better than average" performance of S&P 500 is why Warren Buffet confidently bet that the passive index would beat the hedge fund managers at Protégé Partners.[2] On the other hand, S&P 500 index is often a proxy for "market average" also sometimes called "beta" or "benchmark return". The distinction is that "market average" is a different concept from "all investors' average". This means that "market average" has turned out to be "above average" which sounds like a contradiction but the math of including all the money losers shows it isn't. [1] https://medium.com/@akshay_m/stock-market-gives-you-above-average-returns-right-wrong-e46fed174f05 https://medium.com/@akshay_m/stock-market-gives-you-above-av... [2] https://www.google.com/search?q="s%26p+500"+index+warren+buffett+bet https://www.google.com/search?q="s%26p+500"+index+warren+buf...

clairity 8y ago
to further clarify, beta is the statistical volatility of a stock compared to the market return (which has a beta of 0, by definition). volatility is our proxy for the riskiness of a stock; note that higher risk results in potentially higher (or lower) returns (we reward higher risks with potentially greater returns). the true market return is unknowable because it has to include both public and private offerings, and by definition, we can't know (in most cases) the returns on private investments, such as fine art and the like. that's why we use the S&P 500 (or another index) as a proxy for the market return to calculate a security's beta. we don't have enough historical data to truly know how good of a proxy the S&P is (we'd need hundreds of years of data for that, iirc), but most studies consider the margin of error acceptable for research purposes. edit: and in the long run, you can't beat the market (unless you have consistently good insider info).
- sinsterizme 8y ago
  I think you mean a beta of 1. A beta of 0 would mean zero correlation with the market
  - clairity 8y ago
    yes, you are correct! it should be 1, not 0.

by jasode 8y ago

clairity 8y ago

to further clarify, beta is the statistical volatility of a stock compared to the market return (which has a beta of 0, by definition). volatility is our proxy for the riskiness of a stock; note that higher risk results in potentially higher (or lower) returns (we reward higher risks with potentially greater returns). the true market return is unknowable because it has to include both public and private offerings, and by definition, we can't know (in most cases) the returns on private investments, such as fine art and the like. that's why we use the S&P 500 (or another index) as a proxy for the market return to calculate a security's beta. we don't have enough historical data to truly know how good of a proxy the S&P is (we'd need hundreds of years of data for that, iirc), but most studies consider the margin of error acceptable for research purposes. edit: and in the long run, you can't beat the market (unless you have consistently good insider info).

sinsterizme 8y ago
I think you mean a beta of 1. A beta of 0 would mean zero correlation with the market
- clairity 8y ago
  yes, you are correct! it should be 1, not 0.