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If you read Matt Levine's money stuff: a new favorite thing amongst financial products (currently only available to hedge funds, but on its way to becoming reta

If you read Matt Levine's money stuff: a new favorite thing amongst financial products (currently only available to hedge funds, but on its way to becoming retail) is the following: The default investment should be "the diversified market portfolio", e.g. S&P500. Then, if you have opinions (especially negative ones) about companies (e.g. if you are a perennial Tesla bear), you want to invest against those companies. A regular way to do that is to short. Shorting is hard and expensive for retail. A better way to do it is to buy everything in the S&P500 except TSLA. The way to do this is to construct a custom index that is identical to S&P500, except that TSLA is removed and all other weights are adjusted accordingly.

kmckiern 6y ago
A big fan of Matt Levine's thoughts on indexing and how vast amounts of passive investing are impacting the markets.
Ntrails 6y ago
To be clear, that is active investment 101. You start by taking a portfolio matching your benchmark, then you apply an "overlay" which expresses your view. If you have no views, you match the benchmark (a good start- that's what you get judged by!), if your views are good (more x, less y) you make your alpha. Excellent. If your views are bad, said alpha is negative. Sad. But you probably retain a high Beta to the benchmark index. My view remains that stock picking is bad for the average retail investor. Custom indexes are just stock picking with bells on.
- tjs8rj 6y ago
  The S&P is stock-picking by that logic. Rank all the public equities by revenue, select the top 500, then weight them by market cap. Sounds pretty arbitrary doesn't it? Why not rank by profit? Or weight by years in existence?
  - Ntrails 6y ago
    No, it isn't. Not clear if you don't understand or you are being glib. Passive investing logic is simple. You want to invest in stocks. Say you want to invest in the US market. You want a portfolio that represents, to some extent, the market. How do you get that? There is a benchmark index that weights by "how large a proportion of the market is". That seems pretty sound and consistent with the ideal? The issue at hand is an attempt at rebranding a micromanaged portfolio as "index investing" - a term used interchangably with passive investing. I don't mind stock picking. It is a negative sum game and people can play it if they want. But it is irresponsible imo to pretend you are offering something other than what you actually are
    - tjs8rj 6y ago
      I’m being overly glib, but this just highlights the multiple definitions of active vs passive investing. By definition, the S&P is a relatively arbitrary arrangement of stocks. These are picked by an arbitrary rules based algorithm. I happen to pick a lot of them, so the end of being well-representative of the total market, but that’s just a fact of me picking a lot of stocks. This is picking stocks - or stock picking - just straightforwardly. Passive investing to me has nothing to do with the total market except indirectly. The goal with passive investing as I understand it is a portfolio you don’t have to watch, or a portfolio sufficiently uncorrelated between components to be relatively stable. Even investing in the total market is active investing in a way, because you’re choosing equities as opposed to commodities, derivatives on those base instruments, real estate, and so on. The Dow is only 30 hand picked stocks, but it correlates pretty well with the total market, is that stock picking? I get what you’re saying though, my point is just that the distinction between passive and active investing isn’t so cut and dry, and shouldn’t be used so dismissively.

kmckiern 6y ago

A big fan of Matt Levine's thoughts on indexing and how vast amounts of passive investing are impacting the markets.

Ntrails 6y ago

To be clear, that is active investment 101. You start by taking a portfolio matching your benchmark, then you apply an "overlay" which expresses your view. If you have no views, you match the benchmark (a good start- that's what you get judged by!), if your views are good (more x, less y) you make your alpha. Excellent. If your views are bad, said alpha is negative. Sad. But you probably retain a high Beta to the benchmark index. My view remains that stock picking is bad for the average retail investor. Custom indexes are just stock picking with bells on.

tjs8rj 6y ago
The S&P is stock-picking by that logic. Rank all the public equities by revenue, select the top 500, then weight them by market cap. Sounds pretty arbitrary doesn't it? Why not rank by profit? Or weight by years in existence?
- Ntrails 6y ago
  No, it isn't. Not clear if you don't understand or you are being glib. Passive investing logic is simple. You want to invest in stocks. Say you want to invest in the US market. You want a portfolio that represents, to some extent, the market. How do you get that? There is a benchmark index that weights by "how large a proportion of the market is". That seems pretty sound and consistent with the ideal? The issue at hand is an attempt at rebranding a micromanaged portfolio as "index investing" - a term used interchangably with passive investing. I don't mind stock picking. It is a negative sum game and people can play it if they want. But it is irresponsible imo to pretend you are offering something other than what you actually are
  - tjs8rj 6y ago
    I’m being overly glib, but this just highlights the multiple definitions of active vs passive investing. By definition, the S&P is a relatively arbitrary arrangement of stocks. These are picked by an arbitrary rules based algorithm. I happen to pick a lot of them, so the end of being well-representative of the total market, but that’s just a fact of me picking a lot of stocks. This is picking stocks - or stock picking - just straightforwardly. Passive investing to me has nothing to do with the total market except indirectly. The goal with passive investing as I understand it is a portfolio you don’t have to watch, or a portfolio sufficiently uncorrelated between components to be relatively stable. Even investing in the total market is active investing in a way, because you’re choosing equities as opposed to commodities, derivatives on those base instruments, real estate, and so on. The Dow is only 30 hand picked stocks, but it correlates pretty well with the total market, is that stock picking? I get what you’re saying though, my point is just that the distinction between passive and active investing isn’t so cut and dry, and shouldn’t be used so dismissively.