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Huh. That's a novel use of stupid index fund money. Just get your shitty investments listed on the stock exchange and cash out. Index fund buyers don't care, th

by marvin 6y ago

Huh. That's a novel use of stupid index fund money. Just get your shitty investments listed on the stock exchange and cash out. Index fund buyers don't care, they'll swallow it right up and it's free to crash and burn at their expense. You could even do it deliberately, as long as it follows securities regulations. Being a pure momentum strategy, index investing has no intelligence. At one point this would make index fund investing as a whole significantly less profitable. With all the horror stories we've seen unfold in the last five years, you could begin to suspect that boards actively and knowingly execute this strategy. You can only hope that a money manager would be smart enough to avoid the SoftBanks, Ubers and WeWorks. But I don't know that's a given. Shorting them out of your portfolio isn't an obvious strategy either, due to borrow costs and so on. Anyone given a significant amount of thought to this?

mschuster91 6y ago
> You can only hope that a money manager would be smart enough to avoid the SoftBanks, Ubers and WeWorks The problem is, no one has much other choice than to go this route and invest into the "next potential unicorn". With classic stocks stagnating and many government bonds in low to negative interest territory, it's hard to make any noticeable profit. The way to fix this would be to reform pensions to a government-backed system such as Germany or Austria have - that reduces the amount of "dumb money" in the system.
MangoCoffee 6y ago
Uber is not on S&P. https://en.wikipedia.org/wiki/List_of_S%26P_500_companies https://en.wikipedia.org/wiki/List_of_S%26P_500_companies
- marvin 6y ago
  Well, they're in the Russell 1000 and others, not to mention a bunch of ETFs that are basically indexes of their own. If you want a properly diversified global index fund portfolio, you wouldn't want to limit yourself to 500 of the largest American companies. Mine contains 4 funds covering ~2500 global companies.
  - moneywoes 6y ago
    What funds and what is your allocation
    - marvin 6y ago
      You wouldn't know them; the funds themselves are Norwegian. IIRC, the reference indexes amount to 50% MSCI World, 16% MSCI Emerging Markets, 16% MSCI Small Cap and 16% VINX Benchmark (Nordics). Philosophy is diversification, broad coverage of both developed and developing markets, with both high-tech niche industries (heavily overrepresented in the Nordics) and global growth companies (overrepresented in the Small Cap index). Been considering specifically adding China, but dislike the political risk and human rights of top leadership. You might argue that the USA is still overrepresented in this allocation. I was probably underestimating the number of companies covered by this; the Small Cap index alone represents more than 4500 companies. Although I doubt that my funds actually own all of them. Cost is around 0.3% per year.
YawningAngel 6y ago
Indices don't include unprofitable companies for exactly this reason.
- js2 6y ago
  There are several total market indexes and funds which follow them. They hold companies proportional to their market capitalization, irrespective of profitability. VTI holds 29,546,017 shares of Uber as of 5/31 for example. https://investor.vanguard.com/etf/profile/overview/VTI https://investor.vanguard.com/etf/profile/overview/VTI
erispoe 6y ago
Uber is not in the S&P500. And no fund manager is consistently doing better than the market. "Stupid index fund money" looks pretty smart in that regard.
- marvin 6y ago
  It's false that no fund manager is consistently beating the market; you can easily find actively managed funds that have beaten the market for the last 5 years. The big debate is whether this is due to luck or skill, whether it's possible to tell the difference and whether it's possible to determine which fund manager will be successful in the future. Uber is part of some indexes; S&P500 isn't the only one. The efficient markets hypothesis is obviously false, although from a distance it's usually a decent approximation. And in case I'm about to get downvoted for violating the consensus -- 100% of my long-term investments are currently in index funds. But with the growing share of indexed investments, this is a very interesting question. There are currently trillions of dollars (and growing) following the simple momentum strategy that index funds represent. It almost beggars belief that this is not, and will never, be exploited for gain.
  - jacobr1 6y ago
    > The big debate is whether this is due to luck or skill, whether it's possible to tell the difference and whether it's possible to determine which fund manager will be successful in the future. And the other factor is this: if it is skill, do the high-fees still give you a better risk-adjusted return?
    - dsl 6y ago
      > do the high-fees still give you a better risk-adjusted return? Yes. With your standard 2 and 20 fee structure, you don't pay performance fees on anything below 8% returns. Performance fees are where bonuses come from, so anyone coming up short sees capital and employees disappear overnight. RenTech has a 40+% performance fee on their Medallion fund because it consistently generates 60% returns YoY.
pedrocr 6y ago
I don't see how this reduces returns for indexers in particular. Investing in an index means you get the market average. This may result in lower returns for the total market and thus also for indexers but for some active investors to overperform thanks to this some other active investors will need to underperform. Winning that directional bet requires someone else to take the other side of the bet and lose. Total market returns are zero sum.

by marvin 6y ago

mschuster91 6y ago

> You can only hope that a money manager would be smart enough to avoid the SoftBanks, Ubers and WeWorks The problem is, no one has much other choice than to go this route and invest into the "next potential unicorn". With classic stocks stagnating and many government bonds in low to negative interest territory, it's hard to make any noticeable profit. The way to fix this would be to reform pensions to a government-backed system such as Germany or Austria have - that reduces the amount of "dumb money" in the system.

MangoCoffee 6y ago

Uber is not on S&P. https://en.wikipedia.org/wiki/List_of_S%26P_500_companies https://en.wikipedia.org/wiki/List_of_S%26P_500_companies

marvin 6y ago
Well, they're in the Russell 1000 and others, not to mention a bunch of ETFs that are basically indexes of their own. If you want a properly diversified global index fund portfolio, you wouldn't want to limit yourself to 500 of the largest American companies. Mine contains 4 funds covering ~2500 global companies.
- moneywoes 6y ago
  What funds and what is your allocation
  - marvin 6y ago
    You wouldn't know them; the funds themselves are Norwegian. IIRC, the reference indexes amount to 50% MSCI World, 16% MSCI Emerging Markets, 16% MSCI Small Cap and 16% VINX Benchmark (Nordics). Philosophy is diversification, broad coverage of both developed and developing markets, with both high-tech niche industries (heavily overrepresented in the Nordics) and global growth companies (overrepresented in the Small Cap index). Been considering specifically adding China, but dislike the political risk and human rights of top leadership. You might argue that the USA is still overrepresented in this allocation. I was probably underestimating the number of companies covered by this; the Small Cap index alone represents more than 4500 companies. Although I doubt that my funds actually own all of them. Cost is around 0.3% per year.

YawningAngel 6y ago

Indices don't include unprofitable companies for exactly this reason.

js2 6y ago
There are several total market indexes and funds which follow them. They hold companies proportional to their market capitalization, irrespective of profitability. VTI holds 29,546,017 shares of Uber as of 5/31 for example. https://investor.vanguard.com/etf/profile/overview/VTI https://investor.vanguard.com/etf/profile/overview/VTI

erispoe 6y ago

Uber is not in the S&P500. And no fund manager is consistently doing better than the market. "Stupid index fund money" looks pretty smart in that regard.

marvin 6y ago
It's false that no fund manager is consistently beating the market; you can easily find actively managed funds that have beaten the market for the last 5 years. The big debate is whether this is due to luck or skill, whether it's possible to tell the difference and whether it's possible to determine which fund manager will be successful in the future. Uber is part of some indexes; S&P500 isn't the only one. The efficient markets hypothesis is obviously false, although from a distance it's usually a decent approximation. And in case I'm about to get downvoted for violating the consensus -- 100% of my long-term investments are currently in index funds. But with the growing share of indexed investments, this is a very interesting question. There are currently trillions of dollars (and growing) following the simple momentum strategy that index funds represent. It almost beggars belief that this is not, and will never, be exploited for gain.
- jacobr1 6y ago
  > The big debate is whether this is due to luck or skill, whether it's possible to tell the difference and whether it's possible to determine which fund manager will be successful in the future. And the other factor is this: if it is skill, do the high-fees still give you a better risk-adjusted return?
  - dsl 6y ago
    > do the high-fees still give you a better risk-adjusted return? Yes. With your standard 2 and 20 fee structure, you don't pay performance fees on anything below 8% returns. Performance fees are where bonuses come from, so anyone coming up short sees capital and employees disappear overnight. RenTech has a 40+% performance fee on their Medallion fund because it consistently generates 60% returns YoY.

pedrocr 6y ago

I don't see how this reduces returns for indexers in particular. Investing in an index means you get the market average. This may result in lower returns for the total market and thus also for indexers but for some active investors to overperform thanks to this some other active investors will need to underperform. Winning that directional bet requires someone else to take the other side of the bet and lose. Total market returns are zero sum.