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Has anyone tried a simple approach - trying to predict which of the S&P 500 will have the lowest 10% returns, and build an (S&P 500 - 10%) index? It seems obvi

by jmpman 7y ago

Has anyone tried a simple approach - trying to predict which of the S&P 500 will have the lowest 10% returns, and build an (S&P 500 - 10%) index? It seems obvious that the S&P is stacked with some great companies and some old dogs. Does that method not work?

dwohnitmok 7y ago
Intuitively the problem you run into is that occasionally those obviously bad companies have amazing comebacks and you completely miss out on those, so you can still end up underperforming the S&P 500.
smnrchrds 7y ago
Since it's obvious, everyone knows it. And since everyone knows it, it's already priced in. You cannot find an edge by acting on widely-known public information.
- jmpman 7y ago
  I’m acting on the fact that almost all my investments are in the S&P 500, and I don’t have a (easy) way to pick my favorite 450 out of those 500. How would knowing the worst 50 be already priced in? They would be priced lower than they should? Good let’s get them out of my index. How else?
  - nostrademons 7y ago
    They'd be priced low. There is no "should" when it comes to markets - the market price is whatever people will transact at. The problem is that stock price movements depend upon future events - making money in the markets is effectively a future-prediction problem. So if your strategy is to discard the bottom 10%, great, you got rid of Foot Locker and Sears. You also would've gotten rid of Apple in 1998, which was responsible for a good portion of the index's gains over the last 20 years. And you would've kept losers like PG&E, which went bankrupt over a black-swan event (they were doing fine until they burned down a town).
  - vitaflo 7y ago
    Prices of stock are based on future expectation of earnings. This is why you can have a company like Amazon have incredible earnings, but still have the share price tank. IE, expectations were that they would have even more incredible earnings, but they were merely incredible. This is also how you can have companies that are on the verge of bankruptcy get huge stock gains if they defy earnings expectations. As such, expectations of future results are already priced into stocks. It's literally the stock price. Whether a stock moves up or down is based on the delta between reality and expectation.
yodon 7y ago
There are no quick easy hacks that give you reliable above market returns. If there were, enough people would use them that the pricing would correct for it because of demand and the above market return opportunity would disappear.

by jmpman 7y ago

dwohnitmok 7y ago

Intuitively the problem you run into is that occasionally those obviously bad companies have amazing comebacks and you completely miss out on those, so you can still end up underperforming the S&P 500.

smnrchrds 7y ago

Since it's obvious, everyone knows it. And since everyone knows it, it's already priced in. You cannot find an edge by acting on widely-known public information.

jmpman 7y ago
I’m acting on the fact that almost all my investments are in the S&P 500, and I don’t have a (easy) way to pick my favorite 450 out of those 500. How would knowing the worst 50 be already priced in? They would be priced lower than they should? Good let’s get them out of my index. How else?
- nostrademons 7y ago
  They'd be priced low. There is no "should" when it comes to markets - the market price is whatever people will transact at. The problem is that stock price movements depend upon future events - making money in the markets is effectively a future-prediction problem. So if your strategy is to discard the bottom 10%, great, you got rid of Foot Locker and Sears. You also would've gotten rid of Apple in 1998, which was responsible for a good portion of the index's gains over the last 20 years. And you would've kept losers like PG&E, which went bankrupt over a black-swan event (they were doing fine until they burned down a town).
- vitaflo 7y ago
  Prices of stock are based on future expectation of earnings. This is why you can have a company like Amazon have incredible earnings, but still have the share price tank. IE, expectations were that they would have even more incredible earnings, but they were merely incredible. This is also how you can have companies that are on the verge of bankruptcy get huge stock gains if they defy earnings expectations. As such, expectations of future results are already priced into stocks. It's literally the stock price. Whether a stock moves up or down is based on the delta between reality and expectation.

yodon 7y ago

There are no quick easy hacks that give you reliable above market returns. If there were, enough people would use them that the pricing would correct for it because of demand and the above market return opportunity would disappear.