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I find it easier to select what companies not to buy. It's hard to do it cost effectively and with low risk. Short selling or put options is not the answer. Id
by INGELRII 7y ago
I find it easier to select what companies not to buy. It's hard to do it cost effectively and with low risk. Short selling or put options is not the answer.
Idea for a new fund directed at retail investors:
S&P 520 index fund. It's basically just low cost S&P 500 index fund, except that the index tracks 520 largest companies listed and individual investors can remove any 20 companies from their index. If you don't know what to drop, the fund managers drop the 20 smallest and the index becomes S&P 500.
The catch is how to implement this strategy with low cost. In practice the fund as a whole would take input from every fund owner at the time they do rebalancing. Then they would adjust the ownership of the fund based on how the investor performs relative to the whole fund in the next rebalancing. How to implement this may be tricky.
- oh_sigh 7y agoWouldn't the effect of, say 15 of your picks underperforming(good for you) be dwarfed by the other 480 ones performing the same? Couldn't you simulate this fund by buying s&p index fund and buying puts on your 15 picks?
- reascenda 7y agoIt's actually the other way around, at least historically speaking. Typically a very small number of names account for the lions share of the index return.
- kasey_junk 7y agoJust to add an important note, this is true but it’s different names for different people depending on when they enter & exit the index.
- fauigerzigerk 7y agoI think with a sufficient number of investors, this fund would correlate very strongly with the S&P 500 itself. So it should be relatively cheap for the issuer to simply buy the S&P 500 and enter into a swap agreement to cover any difference.
- Bootvis 7y agoUntil it's not and the fund manager goes bankrupt...
- fauigerzigerk 7y agoNo, just like with synthetic ETFs, there would be a number of swap counterparties that would have to cover the difference. If some of them fail (which is very unlikely), the damage would be limited to the difference between the actual portfolio and the S&P 500.
- 1980phipsi 7y agoYou couldn't implement this in a fund structure. It would need to be a separately managed account or something customized to each individual.
- lexapro 7y agoPicking losers is just as hard as picking winners. And you know this otherwise you would just short those 20 picks of yours. So what would happen is that investors who don't pick outperform those who do.
- dsfyu404ed 7y agoIt's easy to identify patterns that let you consistently (consistently enough to make more than you lose) pick companies that will win or lose a little. That's why that task is now automated. Picking the companies that will win and lose by orders of magnitude is hard to do consistently.
- perl4ever 7y agoIs picking the rotten apples at the store just as hard as picking the very best? If you made an index of penny stocks, do you think markets are efficient enough this would be basically as good as an S&P 500 fund? What if you made two indexes, one of penny stocks that pay dividends, and one of those that do not? I've done this experiment years ago with a stock market simulator utilizing real market data, and it suggested that, no, there is not a price at which total shit is a good investment, or if there is, it's not the market price. Therefore it follows that excluding that shit from your index is potentially worthwhile.
- johnbrodie 7y agoPenny stocks are usually traded OTC and aren't in any index fund I've seen anyway. Picking losers is just as hard as picking winners. If you think you know of a loser, just short it. You'll be hard-pressed though, because other people, likely with more info than you, have already done this, and the price has already come down.
- perl4ever 7y agoWhy do you think shorting a stock is (uniformly) just as easy as going long? I don't know where you people get the idea it's symmetric. And the difficulty of shorting a stock varies massively from one company to another, which is a not irrelevant aspect of it. You can't (legally) print unlimited shares yourself to sell short.
- patio11 7y agoThe name for the product category you're broadly describing is "smart beta." This exists in quantity. "SPY but without overvalued stocks in it", etc etc. The reason the exact product you want doesn't exist is because it will have the same returns as SPY but cost 20X as much due to lower economies of scale, broadly because people don't want it.
- devicetray0 7y ago> but cost 20X as much due to lower economies of scale, broadly because people don't want it. For any existing fund manager who tracks an index (i.e. Vanguard), this shouldn't be too difficult or expensive. They're already buying/selling a TON of SP500 shares at the close of trading day. Now they just need to subtract some of those buys/sell for the overvalued companies that people do not want. Am I missing something? EDIT: Oh, I guess the (SEC?) would require a different fund management and prospectus for every index "smart beta" permutation, and therefore wouldn't be realistic.
- acjohnson55 7y agoWhenever I feel the need to use the adverb "just" when talking about something I think someone else should do, it usually means my understanding of the situation is the tip of an iceberg I can't fully see.
- asdfman123 7y agoOh man, reading up on that, smart betas could exercise enormous power over the market if they became popular enough. Imagine if someone was able to immediately exclude you from 20% of investment capital on the market.
- AznHisoka 7y agoJust buy SPY with 95% of your money and then allocate 5% to put options on the losers. if they don’t work out, it was just a hedge. if it did, you had your cake and ate it too.
- INGELRII 7y ago> allocate 5% to put options on the losers How do you do it withing the frame I described the problem (cost effectively and without increasing risk) for relatively small investor?
- AznHisoka 7y agoIn terms of making it a fund, I don't see how it can done effectively. But if you're an individual investor that knows what you're doing (ie have experience with options, etc), it's fairly straightforward to just allocate 5% of your portfolio to liquid long-dated put options.
- mywittyname 7y agoThere's still some complication here. Do you carry options to expiry or trade them before if their value skyrockets? How often do you rebalance?