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“Buy and Hold” No More: The Resurgence of Active Trading

169 points by cristiandima 5y ago

CarelessExpert 5y ago
> Conventional wisdom holds that passive trading is the rational investing strategy. That isn't conventional wisdom. It's not someone's opinion. It's statistically proven reality. Whether you're an individual trader or a billionaire hedge fund manager, active strategies lose out to passive ones in the long run. > has catalyzed a lean-in mindset around investing, particularly among Gen Z. And it will burn them, just like it burned penny stock traders in the 80s and Internet stock traders in the late 90s. The reality is Gen Z'ers are desperate at this point and they're turning to gambling in the hopes of making up lost economic ground. And if that happens en masse, it's not gonna be pretty.
- andi999 5y ago
  So Jane Street and James Simons do not exist?
  - djoldman 5y ago
    I think it's pretty obvious that the parent is talking about the average investor.
    - ghaff 5y ago
      Yes but it's also a fair point that a lot of actively-managed mutual funds out there don't beat low-cost index funds.
    - baobabKoodaa 5y ago
      > I think it's pretty obvious that the parent is talking about the average investor. Really? Because this is what the (grand)parent said: "Whether you're an individual trader or a billionaire hedge fund manager, active strategies lose out to passive ones in the long run." Clearly grandparent was not talking solely about the average investor.
  - ghaff 5y ago
    It probably depends how active and how sophisticated. (And how lucky.) Certainly there are large sophisticated endowments and investment funds that don't simply stick everything in an index fund and call it a day. And many do get better than S&P 500 returns. After all, you need to decide what investments to buy and hold and, presumably, make adjustments over time even if turnover is relatively low.
  - wnevets 5y ago
    There's always winners of the lottery but statically it wont be you.
  - granshaw 5y ago
    Jane Street is primarily a market maker I believe, not something an individual or even a small institution can just go out and do
  - 4TunateSon 5y ago
    Jane Street and RenTech are very different institutions compared to something like Vanguard or Fidelity. They aren't accessable to retail investors/traders, they have different goals, and methods.
    - baobabKoodaa 5y ago
      Nope, you're moving the goalposts now. The grandparent claimed that active investing is not a good choice for _anybody_. So a single example like RenTech is sufficient to disprove that claim.
      - chronic2022 5y ago
        > The grandparent claimed that active investing is not a good choice for _anybody_. So a single example like RenTech is sufficient to disprove that claim. Correct. Too many passive index fund investors on this thread refuse to acknowledge that many hedge funds/proprietary trading firms consistently beat the S&P over 20-30+ years. VTI and VOO are only 9% and 13% since inception in ~2001. Top quant firms like Citadel, Renaissance, Jane Street attain 20-40% annually after fees, over 20+ years. On average, hedge funds underperform. But a UHNW investor is not investing in average hedge funds. They’re investing time-tested S&P-outperforming hedge funds.
  - nceqs3 5y ago
    1) Jane Street isn't that successful. 2) RenTech spends billions every year on compute, data and hiring the smartest people in the world. The average person could never compete with RenTech.
    - centimeter 5y ago
      > Jane Street isn't that successful. Their historical record is very good.
    - baobabKoodaa 5y ago
      > The average person could never compete with RenTech. Grandparent claimed that active investing is not good for _anybody_. A single example (like RenTech) is sufficient to disprove that claim. If you want to move the goalposts to "the average person", then it'll be an entirely different discussion.
- bezout 5y ago
  I’m not arguing the opposite, but I’m very interested in learning more about this. Can you suggest some references?
  - kgwgk 5y ago
    The basic idea is that if you do better than the market - because you have more of the good stocks and less of the bad ones - there may be someone somewhere with the opposite positioning. In this simple model active investors in aggregate cannot do better than the index. Adding transaction costs, fees, etc. they'll do worse - as a group.
  - maksimum 5y ago
    A reference (that lays out the statistical arguments) is "Common Sense on Mutual Funds" by John Bogle.
    - bezout 5y ago
      Thanks
- bitexploder 5y ago
  It will just make buy and hold that much more beneficial.
- nicolas_t 5y ago
  As someone who is doing buy and hold and not doing any day trading, how can I protect myself from the wild swings of the market caused by active traders gambling?
  - zitterbewegung 5y ago
    Dollar cost averaging[1] which is basically you buy any security every x amount of days. This is usually how a 401k is setup where you buy a mutual fund every time you get a paycheck. [1] https://en.wikipedia.org/wiki/Dollar_cost_averaging https://en.wikipedia.org/wiki/Dollar_cost_averaging
    - emerongi 5y ago
      Worthwhile to read the full article, as well as the sources, and decide what is best for you. > The financial costs and benefits of DCA have also been examined in many studies using real market data, typically revealing that the strategy does not deliver on its promises and is not an ideal investment strategy. > Recent research has highlighted the behavioural economic aspects of DCA, which allows investors to make a trade-off between the regret caused by not making the most of a rising market and that caused by investing into a falling market, which are known to be asymmetric.
      - nly 5y ago
        It's not a 'strategy' really. Most regular Joe investors earn a salary every month, and keep spare money invested in the market. DCA isn't a choice in this case, it's the natural result.
        emerongi 5y ago
        It is a strategy. If you sell your house and invest the proceeds into the stock market, DCA says you shouldn't just do one huge buy order, but you should spread your orders out over a longer timeline. It's two different strategies.
- baobabKoodaa 5y ago
  > That isn't conventional wisdom. It's not someone's opinion. It's statistically proven reality. Whether you're an individual trader or a billionaire hedge fund manager, active strategies lose out to passive ones in the long run. This claim is false. Some funds have overperformed year after year with high margins and (relatively) low risk, for decades. For example, Renaissance Technologies' Medallion Fund and Warren Buffett's Berkshire Hathaway. Please show me the "statistically proven reality" that explains these returns.
  - scarmig 5y ago
    2020, Renaissance funds' performance: Closed to outsiders: Medallion, +76% Open to outsiders: RIEF, -23% RIDA, -34%
    - jjoonathan 5y ago
      If I were investing someone else's money, I'd be happy to put a little in RIEF and RIDA in exchange for medallion shares.
    - nceqs3 5y ago
      You forgot to mention that the external funds have performed exceedly well (20+%/year) over the past 15 years even after a 44% performance fee. Also the external funds are different strategies than Medallion.
    - baobabKoodaa 5y ago
      > 2020, Renaissance funds' performance ... Since this is in reply to me, let me ask, what's the implication here? The tone of your post sounds like you disagree with me, but it's not clear what exactly you disagree with? Grandparent claimed that no-one can beat the market. I said that Renaissance Medallion Fund beats the market. Then you post a single-year performance of +76%, which is a really good performance for 2020. So... you agree with me?
      - scarmig 5y ago
        I don't disagree with you that individuals can outperform the market. I do think it's worth pointing out that that doesn't mean that the average retail investor will generally outperform the market, even if they're sophisticated enough to have even heard of Renaissance.
- ericjang 5y ago
  "statistically proven reality" is an oxymoron - past outperformance of passive funds (statistics) are no guarantee of future returns (reality). Some of the math surrounding the derivation of the weakest forms of EMT also relies on the assumption that everyone has access to the same information, which is patently false in the world we live in. Even retail traders sometimes have an information edge (e.g. working at a biotech company or a specialized industry like semiconductors)
  - yoz-y 5y ago
    Please correct me if I’m wrong. But I assume that earning while holding is based on an assumption that the overall productivity continues to rise, while active trading is more of a zero sum game. Any gains you earn is somebody’s loss. Now, the initial assumption could very well hit a wall.
    - baq 5y ago
      notice you're contradicting yourself: active traders don't only trade with other active traders, they also trade with those same passive funds that bet on continuous growth in fundamentals of companies and the hope that eventually that growth will be reflected in the stock price. then consider just how much shares passive funds move all the time due to continuous rebalancing they do due to their self-imposed mandate. (reminder: etfs hold ~$5T worth of assets.)
      - freetime2 5y ago
        > Then consider just how much shares passive funds move all the time due to continuous rebalancing they do due to their self-imposed mandate. One of the big selling points of passive, market weighted ETFs is their low turnover and high tax efficiency. Vanguard’s S&P 500 ETF (VOO) has an annual turnover of 4%, for example. That’s nothing compared to the turnover in an actively traded portfolio. Sure they do a lot of trading volume to account for inflows and outflows from the ETF. But one of the very nice properties of market weighting is that there is hardly any rebalancing needed as individual assets drift in price.
- baq 5y ago
  it used to be like this but now ETFs hold so much weight in the US market that you can easily front run additions/removals for relatively easy money.
- thrav 5y ago
  While you’re right about the majority, there are pockets of young people partaking in sophisticated strategies, and doing quite well. The people in the discord server that I belong to are all using stops to max their downside and get out quick if their instinct proves wrong. After several months on paternity leave, it became clear that greatest barriers to active trading are money and time, like most things. If you’re treating the market like it’s your job, day in and day out, you get a really good feel for the flows, and can move into positions that are turning north pretty easily. The fact that the Nasdaq was about to go on a tear was telegraphed for weeks. There are hundreds of opportunities to do this every day, so you just jump on the most painfully obvious ones, and avoid anything uncertain. If you have a real job, and can’t watch the market all day, every day, you don’t stand a chance. Without fail, the biggest losses in our group would come when someone tried to hop into a position while half watching the market, and then get sucked into their real work. Once you’ve got entry down, the hardest part is training yourself to exit at the right time.
  - CarelessExpert 5y ago
    > there are pockets of young people partaking in sophisticated strategies, and doing quite well. If we could I'd make a 20 year wager that every one of those people will fail to beat the market in the long run. It's very easy to make money on "sophisticated strategies" during an historic 10 year bull run.
    - MattGaiser 5y ago
      https://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-funds-year-eight-brka-brkb.asp https://www.investopedia.com/articles/investing/030916/buffe...
      - deleted 5y ago
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    - thrav 5y ago
      They’re making money up and down. For example, SPY is likely done climbing for a while. Maybe it will squeeze up to ~4160, but it’s either going to be flat or aggressively down in the coming days. Thursday/Friday was a very clear exit day. If it squeezes north and over extends further, it’s a very clear short. If it sits flat for a week until OPEX, it’ll be a clear buy for another leg up, then you reevaluate again. This is what I mean when I say treating it like it’s your job. Go back and look at the big downturn last year. To anyone who was paying attention, it looked like a car crash in slow motion. Only to those of us with other work to do, did it look like a flash crash out of nowhere. The writing is very clearly on the wall for all of this stuff, because the big players needs days to reposition, and will be moving billions of shares, and you can literally watch them do it. The reason active funds don’t do as well as the market is because they have to hedge. You’re always paying a premium to minimize losses when you’re hedging, and you can’t exit fast when your position is worth billions. It’s like turning a freighter, versus turning a speed boat.
- genericone 5y ago
  But passive investing is just that, passive, theres no market information, no price information that influences the shares and prices. How is passive investing sustainable? Doesn't this destroy finance in the long run? Prices being completely detached from a listed company's financial viability and business profitability... thats bad isnt it?
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  - omgwtfbyobbq 5y ago
    Why do you think prices are completely detached from a company's financial viability and business profitability? If I invested in a fund that's indexed to the S&P 500, and a company doesn't do well and drops out of the index, then the fund will sell that company and buy whatever replaces them. Ideally, sure, the fund could have known ahead of time and sold before the company dropped out of the S&P 500, but that's trying to time the market, which generally doesn't go well over longer periods of time. It wants to capture gains in the aggregate over long periods of time, not maximize gains. The more individuals and firms try to maximize gains, the more likely they are to get bit over the long term.
    - paulgb 5y ago
      > If I invested in a fund that's indexed to the S&P 500, and a company doesn't do well and drops out of the index, then the fund will sell that company and buy whatever replaces them. The company drops out of the index on poor performance because its market cap goes below some threshold, because active investors short it or sell it when its poor performance makes it overpriced. If every investor is passive, there is no mechanism for the price to reflect the company's underlying finances.
      - omgwtfbyobbq 5y ago
        > If every investor is passive, there is no mechanism for the price to reflect the company's underlying finances. Sure, but that's a big if. We're a long way from 100% anything. Also, a company can drop out of an index even when it's doing well just because investors are running a short campaign against it, so I would caution against the assumption that all market performance is because of poor company performance. In general, the trend has been for most active investors to underperform the market, in part because they charge higher fees, but also because successful active investing is very hard to do consistently. People moving away from those active investors and to index funds won't hurt the market because they generally don't do as well as the market. Now, if people move away from effective active investors, then that could lead to the problems mentioned, but I've never heard of people moving away from effective active investment.
- duxup 5y ago
  How many folks are out there as active traders? I'm not sure how big en masse really is here.
- deleted 5y ago
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- mucholove 5y ago
  What it does do...for sure is make you go crazy. Traders are pretty wired. People building long term businesses (Like 10 year horizon plus) are on a different gravity.
- madrox 5y ago
  If there’s anything different about GenZ, it’s that they’re crowdsourcing their plays, making them behave more like a distributed mutual fund than a bunch of gamblers. Time will tell if that performs better.
  - airstrike 5y ago
    Or they're just getting played by finance "influencers" who buy into trades first and make most of the profits
  - gruez 5y ago
    spoiler: it won't. There's going to be outperformers, just like if you have 1000 people flipping coins, you're going to find a few with an uncanny ability to get consecutive tails/heads after several flips. That doesn't mean they're any good at it though.
    - voces 5y ago
      The average of the coin flip will be near 50% though. If you let a 1000 people give their opinion on if a stock is up or down in a month, you are likely to do better than random guessing (opinion is a weighted coin). For instance, taking the top 50 stock pickers from the finance section of newspapers will demonstrably lead to a decent, better than random guessing, portfolio. You are assuming that the stock market is as-good-as-random, and that you can't crowdsource aggregate market sentiment and private information (someone who knows that they will buy the next 5 Tesla cars, so they will contribute to the growth). If you have a 100 of those private information owners, and you aggregate it, you just encoded for brand loyalty. People betting on the GameStop play did so, in part because they were made aware that they were not the only one with nostalgia and hope for GameStop. They did this by pooling their private information. Finally, if you do assume that clueless pickers are the same as a coinflip, then their noise should cancel out, leading to a very uncertain prediction of 50% (so you turned their non-knowledge into valuable information about the variance/confidence/mindshare penetration/information availability), and then the real experts votes will balance the vote in favor of the most likely prediction (you distilled their expertise). Taken my counter-example to your spoiler to the extreme: Imagine if all Redditor stock traders gave their honest best guess on if a stock would be down or up next month. The market would become very predictable with that information. Crowdsourcing a subset, just lowers this predictability (but never down to the level of a coin-flip). This crowdsourcing for predictability is precisely the reason the bigger, profitable hedgefunds are crawling Reddit, viewing 16-year old Crypto coin pickers on Youtube, and analyzing retail trades on RobinHood.
- pastrami_panda 5y ago
  This is true historically. But at certain times it's a complete no-brainer to enter the market or not. For instance consider post Covid at around March/April 2020. Stocks have dropped 20-30%. It took Moderna 2-3 days to develop a vaccine, is a 20% drop in e.g. Apple justified, or is it simply free money?
  - ghaff 5y ago
    Or were we on the verge of a complete global economic meltdown? I admit I transferred a fair bit into very safe investments at the time. As a result I didn't do as well as I could have (but well enough). But it was still a reasonable hedging strategy IMO.
  - baobabKoodaa 5y ago
    > This is true historically. Nope, this is false. Please look up the historical performance of Renaissance Technologies Medallion Fund.
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  - klipklop 5y ago
    I did this exact thing and got in big in march 2020. I also heavily bought US tech stocks the day brexit passed. To me it seemed like free money.
  - JohnJamesRambo 5y ago
    How far would the stocks have fallen if the US hadn’t pumped absolutely massive amounts of money into the stock market? When it falls and keeps falling people suddenly realize how worthless all the paper stocks they have been buying are and don’t want to keep buying more. I suspect 30% drop would have been the tip of the iceberg and no one asked me if I wanted my tax dollars spent this way so the rich that own all the equities could keep their paper gains. Top 1% own 38% of the value in stocks.
- mancerayder 5y ago
  I'm running counter-current here. I bought a vaccine maker last year, putting a quarter of my stock portfolio in it over time (several buys on dips). The vaccine maker was then approved, and is one of the biggest ones rolling out globally. This wasn't a one off, as I continued to follow the news and bought more blocks over several months. My portfolio is up a significant amount. On one year blocks, I'll start to sell since it'll be taxed as long-term capital gains. That's non retirement brokerage account. Now in my IRA, I buy and sell every few months on dips and peaks. It doesn't have to be perfectly timed, but it's going up. My portfolio is 70% cash and I've been beating the market the past 5 years. Other winners include tech companies and a space company. Someone explain to me why I'm an imbecile and why I should have been invested in Vanguard index funds, something I did for decades prior to thjs.
  - CarelessExpert 5y ago
    > Someone explain to me why I'm an imbecile and why I should have been invested in Vanguard index funds Simple: you got lucky in a bull market. Let's revisit how you're doing in the next recession or after a couple bad bets. If you want a deeper answer you'll have to do your own digging, as it's a big topic. But it's worth starting with the efficient markets hypothesis and reading some of the work of Jack Bogle.
    - mancerayder 5y ago
      Why would I have the same strategy during a bear market? How do index funds fare during a bear market? Might the 70 pct cash I have be used for non equity investments, like real estate? There's something strange about the framing of the passive index fund scenario. Over 20-30 years? I'm not interested in beating that benchmark if I'm interested in increasing my net wealth in the next few years. Downvote away, this is my experience and feeling on the topic, not financial advice to others.
      - CarelessExpert 5y ago
        Well you can keep arguing based on your feelings. I'm arguing based on data. You can choose to ignore that data and try your luck. Just recognize your past performance will not guarantee future returns.
- stewbrew 5y ago
  Any statistical prove makes certain assumptions and as with every assumption, there are diverging views. In that particular case, the prove ignores any aspects that cannot be modelled and then be tested like, e.g., domain knowledge that gives you a headstart over other market participants. As always, I'd say the truth is somewhere in the middle.
- fighterpilot 5y ago
  > active strategies lose out to passive ones in the long run. This is only true in the average. Most people can't do it. It's false if we're talking about specific strategies (e.g. Medallion Fund). There are computerized short-term strategies that print money almost every single day, deployed in a few of the large firms.
- tim333 5y ago
  Value investing strategies sometimes beat just buying the index.
- martinflack 5y ago
  > The reality is Gen Z'ers are desperate at this point and they're turning to gambling in the hopes of making up lost economic ground. There is a certain rationality to this, when you're coming from so far behind. If you need a million dollars and you start with $200K, you set a timeline and a prudent plan. If you need a million dollars and you start with $2K, you're so far behind[0] you may as well gamble. I do not necessarily advocate the latter. I'm just articulating the thinking/emotion. [0] 2000 at 7% p.a. takes 92 years to top a million if my arithmetic is correct.
lupire 5y ago
Article misses the point (perhaps due to their capital investments) that the resurgence in active trading is almost entirely just gambling, but exempted from casino regulation. Also, saying "no more" to refer to a blip fad is a ridiculous healdit.
- Scoundreller 5y ago
  ... and with much lower commissions than betting on horse/footballer/dog races.
  - gruez 5y ago
    Is it? Robinhood allows you to trade for free, but that's not the whole story. Bid-ask spreads add an implicit fee to each transaction. This is small for highly liquid stocks, but buying blue chip stocks directly also isn't exactly exciting. If you want the excitement of gambling you'd need to either use margin (borrowing fees) or options (worse spread).
    - hogFeast 5y ago
      If you bet on a liquid market, you will pay vig of something like 1-2%. Where I am, it is actually cheaper to bet (just think about how unbelievably fucked that is...you can see why VCs want to insert themselves into that) but in the US your trade costs are probably underneath that level all-in.
  - nly 5y ago
    Depends. There are sports betting platforms outside of the US that work like stock exchanges. Betting exchanges can offer good liquidity, tight spreads and commissions as low as 2%
  - jdhzzz 5y ago
    I do 99.9% of my gambling in the stock market because it historically is positive sum. Even with costs (commissions, fees, bid/ask spread). For me to win, you don't have to lose. Straight gambling cannot offer this.
playingchanges 5y ago
Tell that to all the active managers who bailed last spring instead of holding their tech stocks lol.
deleted 5y ago
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bromquinn 5y ago
I kind of hate the idea of encouraging young people to pursue speculation instead of building. Post-IPO investing doesn't create a ton of value for society.
- hehaheha 5y ago
  I know what you mean but this notion of buy and holding index was perhaps a mirage. It’s all theoretical and cynical side of me thinks it was “invented” as a way to appropriate pension and retirement funds into Wall Street machination.
- hogFeast 5y ago
  How do you think VCs are getting rich? IPOs and transactions are more profitable than building companies with sustainable business models (by definition, it is usually cheaper to buy a bad company, attempt to flip it in the capital cycle than buy a good company which is likely expensive/impossible to buy).
- kgin 5y ago
  The post-IPO market is the only thing that gives the IPO market any value. Hope of an IPO has encouraged countless people to build things. I have a hard time believing investing has been a net negative to creation at all. If anything, it has increased the incentives in the system. Post-IPO investing is essential to the IPO which is essential to VC which is essential to startups.
- fighterpilot 5y ago
  I disagree. The pricing of post-IPO stocks is responsible for trillions of dollars of capital allocation, since the amount that public companies can raise is linearly proportional to the stock price. It's not an unimportant problem to get right, unless you think it doesn't matter whether billions of dollars get allocated to GME versus MRNA. A clown show where GME gets all the funding (due to its high stock price) and real companies don't is not going to lead to a productive and healthy economy.
CynicusRex 5y ago
Thinking out loud, but to me, any economic system is flawed if it rewards bankers, hedge funds, venture capitalists, and speculation more than carpenters, plumbers, or any other profession that requires actual real world skills. My gut tells me that finance should be automated by computers without a profit motive because greed rots the soul and our environment.
- gruez 5y ago
  >Thinking out loud, but to me, any economic system is flawed if it rewards bankers, hedge funds, venture capitalists, and speculation more than carpenters, plumbers, or any other profession that requires actual real world skills "real world skills" is a nebulous concept. What counts as a "real world skill" and what doesn't? >My gut tells me that finance should be automated by computers without a profit motive because greed rots the soul and our environment. You mean some sort of planned economy? Those have not worked well historically. Even if you somehow outsource it to an unbiased computer, who sets the weights? What's the relative value of an apple compared to an banana?
  - CynicusRex 5y ago
    >"real world skills" is a nebulous concept. What counts as a "real world skill" and what doesn't? Got a sprain? Call a doctor. Leaking pipe? Call a plumber. Doesn't seem nebulous at all. Conversely, speculation and greed ruining the world? Call on the populace to bail them out. Speculation doesn't build or fix physical stuff. >You mean some sort of planned economy? Those have not worked well historically. Because historically it has been done on inferior computers. Whereas now we have the computing power to calculate the economy n-times over. Dr. Paul Cockshott on Cybersocialism: https://www.youtube.com/watch?v=LtlZys7QOO4 https://www.youtube.com/watch?v=LtlZys7QOO4. That being said, I'm sceptical as well; the video leaves many things unanswered which he expands on in his books that I have yet to read. However, I welcome any ideas on how to detach humans from having to deal with money, so we can collectively pursue more lofty goals, beyond profit.
    - cortesoft 5y ago
xiphias2 5y ago
Maybe a16z doesn't like it, but ,,buy and hold'' active investing works quite well. Passive investing means doing what your bank advisor suggests. People are starting to realize that those advisors may not make smarter decisions on where the world is going than the people themselves.
- CarelessExpert 5y ago
  That's not what "active" or "passive" mean in the investing context. Active investing refers to active equity or bond selection and investment with the goal of generating excess alpha (i.e. beating the market) Buying a traditional, managed mutual fund is a form of active investing. Passive investing involves buying a large, diversified portfolio of equities and bonds such that you hold a percentage of the whole market. This is "passive" because there's no attempt to select specific stocks. The goal is simply to match the market by owning a portfolio that's representative of the market. Buying an S&P 500 index fund is a form of passive investing. Both could be done in consultation with a financial advisor.
  - xiphias2 5y ago
    Sure, you are right, but even with that definition somebody could have just bought Apple/Google/Amazon/Facebook/Tesla/ other high growth stocks/Bitcoin 10 years ago, and just waited. I see more of this kind of active investing happening (people reading Tesla blogs and going to meetups as an example, deconstructing software updates to see how the models are being ported 1-by-1 to the new framework. Financial advirsors generally don't do this in depth due diligents for products (or at least I haven't met any). As an example I read through a part of the Bitcoin source code to see how well it's written before investing in it, and I haven't seen any financial advisor who even looked at its github repo, and they already have opinion on it.
  - nly 5y ago
    I mean it's a spectrum. If you put 100% of your wealth in SPY then you're actively choosing to disregard over half of the global investable equity market. Asset allocation is another active investment decision.
WalterBright 5y ago
One thing active trading does is subject you to much higher short term tax rates. You'll also lose a bit on the spread every time you trade, even with zero commission brokerage fees. The longest stock I've held is Boeing (40 years).
- fnord77 5y ago
  unless you're trading in an IRA
  - WalterBright 5y ago
    Of course (though the spread will still hurt). But there's a limit on how much you can contribute to an IRA. A serious investor will find the IRA contribution limits make it inconsequential. You also wouldn't want to fund the IRA with money you'll need before 65.
    - fnord77 5y ago
      you can have millions in an IRA if you had rolled over past 401ks etc.
xyzelement 5y ago
I am a hedge fund guy who invests his own $$$$ passively so make of this what you will. There will always be a mix of active and passive. Fundamentally - passive only works when it follows smart active. Actives do expensive research and trade against each other to arrive at the consensus price. Passives trade at that price for "free." Since both get the same price on average but passives incur no cost, they win on average This breaks down if passives outnumber actives, or if actives are exceptionally stupid. Imagine 100% is passive. That means any stock in an index will be bought tomorrow and forever regardless of price. I could exploit that in a ton of ways. For example, do a "squeeze" (think of the recent GME short squeeze but in reverse.) Or, imagine company X will obviously default but stock keeps going up because passives are obligated to buy. Very easy to exploit by going active! Finally - think about this. Does your index fund have any GME? That part of your portfolio trades at the price set by Reddit apes. The more of that goes on, the more tempting it is to go "active" on the other side.
- hehaheha 5y ago
  That’s not quite right about passive and active though. It almost always resets every quarter (or other liquidity events). Passive introduced delayed price discovery and as a result greater volatility around earnings (or liquidity events). But over medium to long term passive vs active should not matter.
  - xyzelement 5y ago
    Why isn't it "quite right?" I spelled out 3 scenarios that can play out and obviously will given the structure and incentives. Where do you disagree?
    - hehaheha 5y ago
      Because passive does not necessarily mean index. You can be passive and concentrated (see ARKK). And more importantly real world indices are moving target to begin with. They’re just very rough approximation of market basket. SPX is not representative of market as it relates to mpt at all. In fact that’s likely one of the biggest myths in modern finance.
m3kw9 5y ago
When ever a16 posts articles there is always bias to the companies they invested within. Long trade is definitely still around, just wait till everyone has other things to do
hehaheha 5y ago
It’s not resurgence of active trading. It’s a new brand of highly levered trading. We’ve never seen anything like it before. This was highlighted at institution level with Softbank last year and recently with Bill Hwang and Archegos debacle. And you see retail trading weekly options in high volume. Is it gambling? When was investment not gambling? It was always “informed” gambling with positive expected avg return. What’s the economic impact of this behavior though? I want to say it’s generally negative since it’s bound to grossly disrupt proper price discovery but was that even the case before this period of excess leverage? I doubt it.
jackcosgrove 5y ago
The only issue I take with this article is their seemingly blase take on the risky investing behavior of Gen Z. Sure, if that's the lay of the land then use it to your advantage. But it seems a bit predatory. Risky activities tend to hurt more investors than they help, and lead to a small number of big winners and many losers. You can't just increase risk and increase reward for everyone. Regarding the predicament Gen Z is in, just remember that the older generations - one of which is very large - will need to sell their assets at some point. I know it's hard to hear, "Be patient" when you are young and have already been patient, but demographics is working against asset values in the next twenty years or so.
- SimonPStevens 5y ago
  > demographics is working against asset values in the next twenty years or so. As someone who is about half way towards retirement, how is it best to work with this? My future retirement income seems to be mostly dependant on having the right selection of investments for my pension account to grow in time for when I stop working. It's currently split between a few low cost, broad indexes. But if we expect asset values to go down as older generations sell off, am I going to see this pension pot fail to meet what I need it to in order to cover my retirement. My pension advisor just seems to blindly follow the script of 'passive beats active', and expects 5% annual return. Which I just go along with, mostly because I have no idea what else to do. Am I being too pessimistic when I really can't see 5% return being likely. How do I go about making sure my retirement is provided for. It kind of annoys me I have to seemingly be constantly figuring out the market situation to make decisions on what's best. Why do I need to be a stock market expert to manage my pension. What I'd much rather do is pay for a future pension more like an insurance plan. I pay monthly now, and some experts who know what they are doing worry about the investment strategy, and I just get a fixed pension payment.
  - prirun 5y ago
    It sounds like you want an annuity. Your returns will likely be lower, with the issuer taking the risk (and getting the higher rewards), but you return is guaranteed and the issuer's is not.
im3w1l 5y ago
My thoughts on passive investing have evolved a lot over the years. First I had a rather unsophistacted view of The Index, as a kind of benchmark you were aiming to beat. Then came an uncomfortable realization. There are multiple indices. Which one should you aim to beat and why? This question stuck with me and I didn't manage to resolve it at the time. Then I learned about the argument that active investors cannot beat passive investors because on average these two groups will hold the same stocks in the same proportions. The active investors are just trading stock back and forth and incurring fees in the process. This seemed logical and convincing at the time. A few years later I was trying to think on a theorethical level, how can active investors stand a chance against passive investors, if on average they hold the same things, and the passive investors don't incur fees? What I came up with was this: Stocks enter and exit indices. So even index funds have to do the occasional trade. If active investors as a group buy a stock before it enters an index, they can gain a leg up on the passive investors. Then I thought of something even worse. A bad actor could "poison" the index by founding companies. Trade a few stocks back and forth with a buddy to establish a high market cap. If it makes it into the index, the index funds have to buy from you.* Another thing that an index fund has to do is buy and sell when people enter and exit the fund, and when it does it has to trade with active investors. If active investors can predict in/outflows into the index-fund they can beat its cap-weighted**performance. Recently I've been thinking about the inclusion criteria for the index. This kind of ties in with all of the previous threads I mentioned and unifies them. Every index has a bunch of inclusion criteria, this is completely necessary and inescapable or else the poison problem becomes serious. Whichever index you choose, there will be some good companies inside and some bad companies outside. Thus there is no right index to choose. And here is another opportunity for active investors as a group, trying to beat the inclusion criteria of the index. Avoiding the poison better than the index funds. And picking good companies that didn't make it inside, and of course investments that are outside the index because it's in a different region, or because they are not stock at all. * This is a simple example. You could imagine a much more sophisticated scheme, with many different actors trading stocks back and forth, and mixing real companies in with the duds. ** An example to help the imagination: An index fund falls in value, almost everyone exit the fund. It recovers, people come back. Even though the fund is +-0, the average investor has lost money.
voces 5y ago
Passive trading is the only way to beat other players with more resources and information than you. As soon as you become a market-identifiable active trader, your behavior will be monitored and reverse-engineered. More power to retail investors to play along with the big players, and increased media hype --driven by vacuous memes and unclear-value-adding cryptotech-- giving more interest, only will unfavorably balance towards to the bigger players. I think the resurgance of retail stock trading in the last 2 years or so, is not due to the uncertain economy (again, only big players really benefit from market uncertainty), but because there really were few other places to put your money (negative interests rates, high gold prices, impossible real estate market) and the Fed printing money and keeping the market from collapsing, led to a fairly certain economy, where the Fed would garantuee your losses, but you could keep the wins. This top-down manipulation was obvious enough to trickle down to retail investors using RobinHood. In smaller, emerging, markets, quantitative active trading has become very competitive. Some markets, still profitable to active trading, are now beaten by a "mindless" passive trading strategy. Like stocks, it makes little sense anymore. Wallstreet bets is a non-regulated pump-and-dump group, in the upper echelons ethically worse than the owners of the biggest hedge funds (who won't take profit on some plays if they know it causes long-term damage to the economy, the economy being a matter of national security). The GameSpot play made a few of those a millionaire, lost the college funds of people too late to jump on the bandwagon, and done damage to the degree of billions, when hedge - and pension funds had to withdraw from solid businesses such as Google and Amazon, to cover the losses from this memetic war. You can also state that the drivers of the bandwagon, were doing a passive strategy spanning years. It is the active trading of the bandwagon that made their strategy worthwhile (and not a poorly-informed play based on nostalgia and potential). Numerai also is a passive investing (3 weeks+) fund. They are not that different from a hedge fund buying prop data. I do think the article is interesting, and adds information on a new emerging trend. But it also reads a bit too kind and objective, like a music journalist describing a new album she isn't a particularly personal fan of. Subtleties will be missed, while the overal picture still is objective and correct to the quality. As an investor myself, both active and passive, I progressed the most when I learned how the game is played at the top level. Active meme traders should do well to investigate these top players, just like these top players are studying them. RobinHood's order book is fed to the top players. They stand to gain by promoting this active retail trend, and taking near-certified profit on top of these predictable low-information emotion-driven masses. Buy things like Tesla or social media technology, which you as a 20-year-old, see using in 10 years. That's the way to beat the 35 year old senior Goldman Sachs analyst.
Animats 5y ago
"A combination of illusory superiority bias—the belief that we are more financially savvy than we actually are—and a culture of financial optimism leads most retail traders to believe they have above-average trading ideas and strategies." Um, yes. Retail investors as a class lose money. Remember, you're betting against people for whom this is their day job, work in a business that drops the losers, and have far more money than you.
- 01100011 5y ago
  And 84% of the stock market is owned by the top 10%. I try to remind myself it's not my sandbox.
- voces 5y ago
  I see this as more favorable. With the internet, and with like-minded online communities, the average retail trader is way more informed and skilled than one 20 years back. The level of hubris may have corrected accordingly, not be based on illusiory superiority bias. Incorrect risk management from investment bankers, treating highly-variant finance as deterministic physics, and a fanciness of extremely smart people to invent extremely complex solutions, which obfuscate the ever-increasing assumptions and are less robust to black swan events. This illusory superiority bias over the common man, giving too much authority and decision-making power to a set of mathematical functions, and a culture of financial optimism and realization that you are too big to fail. This is what caused the big crash of 2007-2008. The common man, as a class, lost money from that crash. In response, Bitcoin and fractional stocks were introduced. New markets emerged, where wearing a suit or MBA seems a negative, not a value add. Now, as a class, you at least have the possibility to win money. Else you always lose (but maybe that's the natural way it is supposed to be, not everyone can be the queen ant, or has the adaptation capacity to become one). BTW: every hedge fund that opened their data to the public, saw better, more accurate, models being build on that, than any of their elite quants in-house was able to beat. The masses, when harnassed, are no match for even the biggest hedge funds.
- deleted 5y ago
  [deleted]
RickJWagner 5y ago
It reminds me of the investing environment just before the big crash of 2000. I remember going to my bowling league and hearing some guy talk about how he had just quit his job to become a full-time day trader. Apparently he'd been making money at it for months and figured he was a financial genius. We quickly saw that wasn't really the case. I believe in the Boglehead philosophy..
worker767424 5y ago
Remind me to put my money in Citadel and not a16z.
JohnJamesRambo 5y ago
I feel like passive Boglehead rules worked best because it existed in the period when America stacked the deck to make it where stocks always went up and everyone always wanted dollars. America left the gold standard in 1971 and Bogle introduced index fund investing in 1976. I wonder how successful it would have been without lots of unbacked dollars available for decades. I think we are reaching the end of that era. I guess we shall see.
worik 5y ago
Every generation, it seems, has to learn its lessons all over again.
Rury 5y ago
Frankly, I think passive investing has ruined the fundamentals of investing and in part responsible for the poor financial health of our economy. While the idea behind passive investing may seem like a good one, people often forget it's a double edge sword. By this I mean, when you invest into an ETF or index fund, that money in turn goes into everything underneath it. All too often that money isn't invested in the underlying equities in any intelligent way, and so some of it ends up in ridiculously bad equities. Because of this, there are complete zombie companies that are worth multi billions today, which sell no more than 2 widgets a year and haven't seen growth for nearly a decade... They are only worth so much because money keeps flowing into them from being apart of a hot ETF.
- nradov 5y ago
  Could you give us examples of those zombie companies? What are the ticker symbols and which indexes include them?
  - Rury 5y ago
    NNDM is an example. Hasn't seen any growth despite having a marketable product over their entire 8 year timeframe. Worth ~2B right now despite only making ~3.4M in revenue per year and losing ~50M per year. All thanks, to becoming apart of ARKK.
    - superdimwit 5y ago
      ARKK is far from passive
      - Rury 5y ago
        Sure it is. The money you put into it is placed for you. That's passive. The fund itself may algorithmically place it in various things, but that's outside your control. Conversely, look at super undervalued companies like JKS and CSIQ. JKS is the largest and fastest growing solar company in the world BTW. Yet these companies sit mostly under foreign market ETFs which have never been very popular, and hence why they largely remain undervalued.
pmorici 5y ago
This seems to be conflating buy & hold with passive investing. What is it called when you don't invest in index funds you pick stocks and then buy and hold them for the long term? Seems to me there is passive and active investing and the opposite of buy & hold is day trading. I'm also not sure that I buy the argument made elsewhere in this thread that you need active to make passive work. Indexes upon which funds are based often have a system of rules for how individual stocks are added and removed from the index that are based on the companies financial performance which is what ultimately drives the stock.
- jackcosgrove 5y ago
  > What is it called when you don't invest in index funds you pick stocks and then buy and hold them for the long term? It's not so much about time-frames but rather familiarity with the details of a company or sector, but the term you're looking for is probably value investing.
Black101 5y ago
If I make 20% in one day, I will be active, otherwise, I will be in between passive and active.
LatteLazy 5y ago
>Active investing is a natural extension of hustle culture The sad thing is I think this is true except that far fewer active trades than hustles make a profit...
tim333 5y ago
It's not really mentioned in the article but the rise of speculative trading is fairly normal at the end of a bull market. People see their friends stocks have gone up and figure they can get in on that too. (Jeremy Grantham going on about such stuff https://youtu.be/RYfmRTyl56w?t=195 https://youtu.be/RYfmRTyl56w?t=195)
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kbos87 5y ago
I have no doubt that active trading is seeing a resurgence in interest driven by apps like Robinhood that make it easy to do. But I’d be willing to bet that the returns active traders as a whole are just getting are worse. Public is an interesting place where you can see behind the curtain of who the folks using these services actually are and what their logic is. (Trades on Public are visible to everyone by default, and it’s basically a giant message board.) Five minutes in and you’ll see that 98% of the activity looks a lot more like gambling than anything that might be driven by a plan or strategy. That’s fine and I don’t say that to disparage Public’s users, but it’s important to be realistic about what’s going on here. I believe Public also encourages/seeds the community with celebrities and “experts” / quasi-influencers who are clearly trying to make a name for themselves on the platform. Some of them share basic advice, while others drive short spurts of mania based on their investment decisions. Watching it all play out has solidified in my mind that active investing is a losing game all around.
user743 5y ago
All these sophisticated comments and no one has mentioned that the stock market has turned into a giant scam since companies stopped paying dividends either completely or reduced them to a meaningless amount. Stocks have zero intrinsic value without dividends.

169 points by cristiandima 5y ago

> Conventional wisdom holds that passive trading is the rational investing strategy. That isn't conventional wisdom. It's not someone's opinion. It's statistically proven reality. Whether you're an individual trader or a billionaire hedge fund manager, active strategies lose out to passive ones in the long run. > has catalyzed a lean-in mindset around investing, particularly among Gen Z. And it will burn them, just like it burned penny stock traders in the 80s and Internet stock traders in the late 90s. The reality is Gen Z'ers are desperate at this point and they're turning to gambling in the hopes of making up lost economic ground. And if that happens en masse, it's not gonna be pretty.

andi999 5y ago
So Jane Street and James Simons do not exist?
- djoldman 5y ago
  I think it's pretty obvious that the parent is talking about the average investor.
  - ghaff 5y ago
    Yes but it's also a fair point that a lot of actively-managed mutual funds out there don't beat low-cost index funds.
  - baobabKoodaa 5y ago
    > I think it's pretty obvious that the parent is talking about the average investor. Really? Because this is what the (grand)parent said: "Whether you're an individual trader or a billionaire hedge fund manager, active strategies lose out to passive ones in the long run." Clearly grandparent was not talking solely about the average investor.
- ghaff 5y ago
  It probably depends how active and how sophisticated. (And how lucky.) Certainly there are large sophisticated endowments and investment funds that don't simply stick everything in an index fund and call it a day. And many do get better than S&P 500 returns. After all, you need to decide what investments to buy and hold and, presumably, make adjustments over time even if turnover is relatively low.
- wnevets 5y ago
  There's always winners of the lottery but statically it wont be you.
- granshaw 5y ago
  Jane Street is primarily a market maker I believe, not something an individual or even a small institution can just go out and do
- 4TunateSon 5y ago
  Jane Street and RenTech are very different institutions compared to something like Vanguard or Fidelity. They aren't accessable to retail investors/traders, they have different goals, and methods.
  - baobabKoodaa 5y ago
    Nope, you're moving the goalposts now. The grandparent claimed that active investing is not a good choice for _anybody_. So a single example like RenTech is sufficient to disprove that claim.
    - chronic2022 5y ago
      > The grandparent claimed that active investing is not a good choice for _anybody_. So a single example like RenTech is sufficient to disprove that claim. Correct. Too many passive index fund investors on this thread refuse to acknowledge that many hedge funds/proprietary trading firms consistently beat the S&P over 20-30+ years. VTI and VOO are only 9% and 13% since inception in ~2001. Top quant firms like Citadel, Renaissance, Jane Street attain 20-40% annually after fees, over 20+ years. On average, hedge funds underperform. But a UHNW investor is not investing in average hedge funds. They’re investing time-tested S&P-outperforming hedge funds.
- nceqs3 5y ago
  1) Jane Street isn't that successful. 2) RenTech spends billions every year on compute, data and hiring the smartest people in the world. The average person could never compete with RenTech.
  - centimeter 5y ago
    > Jane Street isn't that successful. Their historical record is very good.
  - baobabKoodaa 5y ago
    > The average person could never compete with RenTech. Grandparent claimed that active investing is not good for _anybody_. A single example (like RenTech) is sufficient to disprove that claim. If you want to move the goalposts to "the average person", then it'll be an entirely different discussion.
bezout 5y ago
I’m not arguing the opposite, but I’m very interested in learning more about this. Can you suggest some references?
- kgwgk 5y ago
  The basic idea is that if you do better than the market - because you have more of the good stocks and less of the bad ones - there may be someone somewhere with the opposite positioning. In this simple model active investors in aggregate cannot do better than the index. Adding transaction costs, fees, etc. they'll do worse - as a group.
- maksimum 5y ago
  A reference (that lays out the statistical arguments) is "Common Sense on Mutual Funds" by John Bogle.
  - bezout 5y ago
    Thanks
bitexploder 5y ago
It will just make buy and hold that much more beneficial.
nicolas_t 5y ago
As someone who is doing buy and hold and not doing any day trading, how can I protect myself from the wild swings of the market caused by active traders gambling?
- zitterbewegung 5y ago
  Dollar cost averaging[1] which is basically you buy any security every x amount of days. This is usually how a 401k is setup where you buy a mutual fund every time you get a paycheck. [1] https://en.wikipedia.org/wiki/Dollar_cost_averaging https://en.wikipedia.org/wiki/Dollar_cost_averaging
  - emerongi 5y ago
    Worthwhile to read the full article, as well as the sources, and decide what is best for you. > The financial costs and benefits of DCA have also been examined in many studies using real market data, typically revealing that the strategy does not deliver on its promises and is not an ideal investment strategy. > Recent research has highlighted the behavioural economic aspects of DCA, which allows investors to make a trade-off between the regret caused by not making the most of a rising market and that caused by investing into a falling market, which are known to be asymmetric.
    - nly 5y ago
      It's not a 'strategy' really. Most regular Joe investors earn a salary every month, and keep spare money invested in the market. DCA isn't a choice in this case, it's the natural result.
      - emerongi 5y ago
        It is a strategy. If you sell your house and invest the proceeds into the stock market, DCA says you shouldn't just do one huge buy order, but you should spread your orders out over a longer timeline. It's two different strategies.
baobabKoodaa 5y ago
> That isn't conventional wisdom. It's not someone's opinion. It's statistically proven reality. Whether you're an individual trader or a billionaire hedge fund manager, active strategies lose out to passive ones in the long run. This claim is false. Some funds have overperformed year after year with high margins and (relatively) low risk, for decades. For example, Renaissance Technologies' Medallion Fund and Warren Buffett's Berkshire Hathaway. Please show me the "statistically proven reality" that explains these returns.
- scarmig 5y ago
  2020, Renaissance funds' performance: Closed to outsiders: Medallion, +76% Open to outsiders: RIEF, -23% RIDA, -34%
  - jjoonathan 5y ago
    If I were investing someone else's money, I'd be happy to put a little in RIEF and RIDA in exchange for medallion shares.
  - nceqs3 5y ago
    You forgot to mention that the external funds have performed exceedly well (20+%/year) over the past 15 years even after a 44% performance fee. Also the external funds are different strategies than Medallion.
  - baobabKoodaa 5y ago
    > 2020, Renaissance funds' performance ... Since this is in reply to me, let me ask, what's the implication here? The tone of your post sounds like you disagree with me, but it's not clear what exactly you disagree with? Grandparent claimed that no-one can beat the market. I said that Renaissance Medallion Fund beats the market. Then you post a single-year performance of +76%, which is a really good performance for 2020. So... you agree with me?
    - scarmig 5y ago
      I don't disagree with you that individuals can outperform the market. I do think it's worth pointing out that that doesn't mean that the average retail investor will generally outperform the market, even if they're sophisticated enough to have even heard of Renaissance.
ericjang 5y ago
"statistically proven reality" is an oxymoron - past outperformance of passive funds (statistics) are no guarantee of future returns (reality). Some of the math surrounding the derivation of the weakest forms of EMT also relies on the assumption that everyone has access to the same information, which is patently false in the world we live in. Even retail traders sometimes have an information edge (e.g. working at a biotech company or a specialized industry like semiconductors)
- yoz-y 5y ago
  Please correct me if I’m wrong. But I assume that earning while holding is based on an assumption that the overall productivity continues to rise, while active trading is more of a zero sum game. Any gains you earn is somebody’s loss. Now, the initial assumption could very well hit a wall.
  - baq 5y ago
    notice you're contradicting yourself: active traders don't only trade with other active traders, they also trade with those same passive funds that bet on continuous growth in fundamentals of companies and the hope that eventually that growth will be reflected in the stock price. then consider just how much shares passive funds move all the time due to continuous rebalancing they do due to their self-imposed mandate. (reminder: etfs hold ~$5T worth of assets.)
    - freetime2 5y ago
      > Then consider just how much shares passive funds move all the time due to continuous rebalancing they do due to their self-imposed mandate. One of the big selling points of passive, market weighted ETFs is their low turnover and high tax efficiency. Vanguard’s S&P 500 ETF (VOO) has an annual turnover of 4%, for example. That’s nothing compared to the turnover in an actively traded portfolio. Sure they do a lot of trading volume to account for inflows and outflows from the ETF. But one of the very nice properties of market weighting is that there is hardly any rebalancing needed as individual assets drift in price.
baq 5y ago
it used to be like this but now ETFs hold so much weight in the US market that you can easily front run additions/removals for relatively easy money.
thrav 5y ago
While you’re right about the majority, there are pockets of young people partaking in sophisticated strategies, and doing quite well. The people in the discord server that I belong to are all using stops to max their downside and get out quick if their instinct proves wrong. After several months on paternity leave, it became clear that greatest barriers to active trading are money and time, like most things. If you’re treating the market like it’s your job, day in and day out, you get a really good feel for the flows, and can move into positions that are turning north pretty easily. The fact that the Nasdaq was about to go on a tear was telegraphed for weeks. There are hundreds of opportunities to do this every day, so you just jump on the most painfully obvious ones, and avoid anything uncertain. If you have a real job, and can’t watch the market all day, every day, you don’t stand a chance. Without fail, the biggest losses in our group would come when someone tried to hop into a position while half watching the market, and then get sucked into their real work. Once you’ve got entry down, the hardest part is training yourself to exit at the right time.
- CarelessExpert 5y ago
  > there are pockets of young people partaking in sophisticated strategies, and doing quite well. If we could I'd make a 20 year wager that every one of those people will fail to beat the market in the long run. It's very easy to make money on "sophisticated strategies" during an historic 10 year bull run.
  - MattGaiser 5y ago
    https://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-funds-year-eight-brka-brkb.asp https://www.investopedia.com/articles/investing/030916/buffe...
    - deleted 5y ago
      [deleted]
  - thrav 5y ago
    They’re making money up and down. For example, SPY is likely done climbing for a while. Maybe it will squeeze up to ~4160, but it’s either going to be flat or aggressively down in the coming days. Thursday/Friday was a very clear exit day. If it squeezes north and over extends further, it’s a very clear short. If it sits flat for a week until OPEX, it’ll be a clear buy for another leg up, then you reevaluate again. This is what I mean when I say treating it like it’s your job. Go back and look at the big downturn last year. To anyone who was paying attention, it looked like a car crash in slow motion. Only to those of us with other work to do, did it look like a flash crash out of nowhere. The writing is very clearly on the wall for all of this stuff, because the big players needs days to reposition, and will be moving billions of shares, and you can literally watch them do it. The reason active funds don’t do as well as the market is because they have to hedge. You’re always paying a premium to minimize losses when you’re hedging, and you can’t exit fast when your position is worth billions. It’s like turning a freighter, versus turning a speed boat.
genericone 5y ago
But passive investing is just that, passive, theres no market information, no price information that influences the shares and prices. How is passive investing sustainable? Doesn't this destroy finance in the long run? Prices being completely detached from a listed company's financial viability and business profitability... thats bad isnt it?
- deleted 5y ago
  [deleted]
- omgwtfbyobbq 5y ago
  Why do you think prices are completely detached from a company's financial viability and business profitability? If I invested in a fund that's indexed to the S&P 500, and a company doesn't do well and drops out of the index, then the fund will sell that company and buy whatever replaces them. Ideally, sure, the fund could have known ahead of time and sold before the company dropped out of the S&P 500, but that's trying to time the market, which generally doesn't go well over longer periods of time. It wants to capture gains in the aggregate over long periods of time, not maximize gains. The more individuals and firms try to maximize gains, the more likely they are to get bit over the long term.
  - paulgb 5y ago
    > If I invested in a fund that's indexed to the S&P 500, and a company doesn't do well and drops out of the index, then the fund will sell that company and buy whatever replaces them. The company drops out of the index on poor performance because its market cap goes below some threshold, because active investors short it or sell it when its poor performance makes it overpriced. If every investor is passive, there is no mechanism for the price to reflect the company's underlying finances.
    - omgwtfbyobbq 5y ago
      > If every investor is passive, there is no mechanism for the price to reflect the company's underlying finances. Sure, but that's a big if. We're a long way from 100% anything. Also, a company can drop out of an index even when it's doing well just because investors are running a short campaign against it, so I would caution against the assumption that all market performance is because of poor company performance. In general, the trend has been for most active investors to underperform the market, in part because they charge higher fees, but also because successful active investing is very hard to do consistently. People moving away from those active investors and to index funds won't hurt the market because they generally don't do as well as the market. Now, if people move away from effective active investors, then that could lead to the problems mentioned, but I've never heard of people moving away from effective active investment.
duxup 5y ago
How many folks are out there as active traders? I'm not sure how big en masse really is here.
deleted 5y ago
[deleted]
mucholove 5y ago
What it does do...for sure is make you go crazy. Traders are pretty wired. People building long term businesses (Like 10 year horizon plus) are on a different gravity.
madrox 5y ago
If there’s anything different about GenZ, it’s that they’re crowdsourcing their plays, making them behave more like a distributed mutual fund than a bunch of gamblers. Time will tell if that performs better.
- airstrike 5y ago
  Or they're just getting played by finance "influencers" who buy into trades first and make most of the profits
- gruez 5y ago
  spoiler: it won't. There's going to be outperformers, just like if you have 1000 people flipping coins, you're going to find a few with an uncanny ability to get consecutive tails/heads after several flips. That doesn't mean they're any good at it though.
  - voces 5y ago
    The average of the coin flip will be near 50% though. If you let a 1000 people give their opinion on if a stock is up or down in a month, you are likely to do better than random guessing (opinion is a weighted coin). For instance, taking the top 50 stock pickers from the finance section of newspapers will demonstrably lead to a decent, better than random guessing, portfolio. You are assuming that the stock market is as-good-as-random, and that you can't crowdsource aggregate market sentiment and private information (someone who knows that they will buy the next 5 Tesla cars, so they will contribute to the growth). If you have a 100 of those private information owners, and you aggregate it, you just encoded for brand loyalty. People betting on the GameStop play did so, in part because they were made aware that they were not the only one with nostalgia and hope for GameStop. They did this by pooling their private information. Finally, if you do assume that clueless pickers are the same as a coinflip, then their noise should cancel out, leading to a very uncertain prediction of 50% (so you turned their non-knowledge into valuable information about the variance/confidence/mindshare penetration/information availability), and then the real experts votes will balance the vote in favor of the most likely prediction (you distilled their expertise). Taken my counter-example to your spoiler to the extreme: Imagine if all Redditor stock traders gave their honest best guess on if a stock would be down or up next month. The market would become very predictable with that information. Crowdsourcing a subset, just lowers this predictability (but never down to the level of a coin-flip). This crowdsourcing for predictability is precisely the reason the bigger, profitable hedgefunds are crawling Reddit, viewing 16-year old Crypto coin pickers on Youtube, and analyzing retail trades on RobinHood.
pastrami_panda 5y ago
This is true historically. But at certain times it's a complete no-brainer to enter the market or not. For instance consider post Covid at around March/April 2020. Stocks have dropped 20-30%. It took Moderna 2-3 days to develop a vaccine, is a 20% drop in e.g. Apple justified, or is it simply free money?
- ghaff 5y ago
  Or were we on the verge of a complete global economic meltdown? I admit I transferred a fair bit into very safe investments at the time. As a result I didn't do as well as I could have (but well enough). But it was still a reasonable hedging strategy IMO.
- baobabKoodaa 5y ago
  > This is true historically. Nope, this is false. Please look up the historical performance of Renaissance Technologies Medallion Fund.
- deleted 5y ago
  [deleted]
- klipklop 5y ago
  I did this exact thing and got in big in march 2020. I also heavily bought US tech stocks the day brexit passed. To me it seemed like free money.
- JohnJamesRambo 5y ago
  How far would the stocks have fallen if the US hadn’t pumped absolutely massive amounts of money into the stock market? When it falls and keeps falling people suddenly realize how worthless all the paper stocks they have been buying are and don’t want to keep buying more. I suspect 30% drop would have been the tip of the iceberg and no one asked me if I wanted my tax dollars spent this way so the rich that own all the equities could keep their paper gains. Top 1% own 38% of the value in stocks.
mancerayder 5y ago
I'm running counter-current here. I bought a vaccine maker last year, putting a quarter of my stock portfolio in it over time (several buys on dips). The vaccine maker was then approved, and is one of the biggest ones rolling out globally. This wasn't a one off, as I continued to follow the news and bought more blocks over several months. My portfolio is up a significant amount. On one year blocks, I'll start to sell since it'll be taxed as long-term capital gains. That's non retirement brokerage account. Now in my IRA, I buy and sell every few months on dips and peaks. It doesn't have to be perfectly timed, but it's going up. My portfolio is 70% cash and I've been beating the market the past 5 years. Other winners include tech companies and a space company. Someone explain to me why I'm an imbecile and why I should have been invested in Vanguard index funds, something I did for decades prior to thjs.
- CarelessExpert 5y ago
  > Someone explain to me why I'm an imbecile and why I should have been invested in Vanguard index funds Simple: you got lucky in a bull market. Let's revisit how you're doing in the next recession or after a couple bad bets. If you want a deeper answer you'll have to do your own digging, as it's a big topic. But it's worth starting with the efficient markets hypothesis and reading some of the work of Jack Bogle.
  - mancerayder 5y ago
    Why would I have the same strategy during a bear market? How do index funds fare during a bear market? Might the 70 pct cash I have be used for non equity investments, like real estate? There's something strange about the framing of the passive index fund scenario. Over 20-30 years? I'm not interested in beating that benchmark if I'm interested in increasing my net wealth in the next few years. Downvote away, this is my experience and feeling on the topic, not financial advice to others.
    - CarelessExpert 5y ago
      Well you can keep arguing based on your feelings. I'm arguing based on data. You can choose to ignore that data and try your luck. Just recognize your past performance will not guarantee future returns.
stewbrew 5y ago
Any statistical prove makes certain assumptions and as with every assumption, there are diverging views. In that particular case, the prove ignores any aspects that cannot be modelled and then be tested like, e.g., domain knowledge that gives you a headstart over other market participants. As always, I'd say the truth is somewhere in the middle.
fighterpilot 5y ago
> active strategies lose out to passive ones in the long run. This is only true in the average. Most people can't do it. It's false if we're talking about specific strategies (e.g. Medallion Fund). There are computerized short-term strategies that print money almost every single day, deployed in a few of the large firms.
tim333 5y ago
Value investing strategies sometimes beat just buying the index.
martinflack 5y ago
> The reality is Gen Z'ers are desperate at this point and they're turning to gambling in the hopes of making up lost economic ground. There is a certain rationality to this, when you're coming from so far behind. If you need a million dollars and you start with $200K, you set a timeline and a prudent plan. If you need a million dollars and you start with $2K, you're so far behind[0] you may as well gamble. I do not necessarily advocate the latter. I'm just articulating the thinking/emotion. [0] 2000 at 7% p.a. takes 92 years to top a million if my arithmetic is correct.

lupire 5y ago

Article misses the point (perhaps due to their capital investments) that the resurgence in active trading is almost entirely just gambling, but exempted from casino regulation. Also, saying "no more" to refer to a blip fad is a ridiculous healdit.

Scoundreller 5y ago
... and with much lower commissions than betting on horse/footballer/dog races.
- gruez 5y ago
  Is it? Robinhood allows you to trade for free, but that's not the whole story. Bid-ask spreads add an implicit fee to each transaction. This is small for highly liquid stocks, but buying blue chip stocks directly also isn't exactly exciting. If you want the excitement of gambling you'd need to either use margin (borrowing fees) or options (worse spread).
  - hogFeast 5y ago
    If you bet on a liquid market, you will pay vig of something like 1-2%. Where I am, it is actually cheaper to bet (just think about how unbelievably fucked that is...you can see why VCs want to insert themselves into that) but in the US your trade costs are probably underneath that level all-in.
- nly 5y ago
  Depends. There are sports betting platforms outside of the US that work like stock exchanges. Betting exchanges can offer good liquidity, tight spreads and commissions as low as 2%
- jdhzzz 5y ago
  I do 99.9% of my gambling in the stock market because it historically is positive sum. Even with costs (commissions, fees, bid/ask spread). For me to win, you don't have to lose. Straight gambling cannot offer this.

playingchanges 5y ago

Tell that to all the active managers who bailed last spring instead of holding their tech stocks lol.

deleted 5y ago

[deleted]

bromquinn 5y ago

I kind of hate the idea of encouraging young people to pursue speculation instead of building. Post-IPO investing doesn't create a ton of value for society.

hehaheha 5y ago
I know what you mean but this notion of buy and holding index was perhaps a mirage. It’s all theoretical and cynical side of me thinks it was “invented” as a way to appropriate pension and retirement funds into Wall Street machination.
hogFeast 5y ago
How do you think VCs are getting rich? IPOs and transactions are more profitable than building companies with sustainable business models (by definition, it is usually cheaper to buy a bad company, attempt to flip it in the capital cycle than buy a good company which is likely expensive/impossible to buy).
kgin 5y ago
The post-IPO market is the only thing that gives the IPO market any value. Hope of an IPO has encouraged countless people to build things. I have a hard time believing investing has been a net negative to creation at all. If anything, it has increased the incentives in the system. Post-IPO investing is essential to the IPO which is essential to VC which is essential to startups.
fighterpilot 5y ago
I disagree. The pricing of post-IPO stocks is responsible for trillions of dollars of capital allocation, since the amount that public companies can raise is linearly proportional to the stock price. It's not an unimportant problem to get right, unless you think it doesn't matter whether billions of dollars get allocated to GME versus MRNA. A clown show where GME gets all the funding (due to its high stock price) and real companies don't is not going to lead to a productive and healthy economy.

CynicusRex 5y ago

Thinking out loud, but to me, any economic system is flawed if it rewards bankers, hedge funds, venture capitalists, and speculation more than carpenters, plumbers, or any other profession that requires actual real world skills. My gut tells me that finance should be automated by computers without a profit motive because greed rots the soul and our environment.

gruez 5y ago
>Thinking out loud, but to me, any economic system is flawed if it rewards bankers, hedge funds, venture capitalists, and speculation more than carpenters, plumbers, or any other profession that requires actual real world skills "real world skills" is a nebulous concept. What counts as a "real world skill" and what doesn't? >My gut tells me that finance should be automated by computers without a profit motive because greed rots the soul and our environment. You mean some sort of planned economy? Those have not worked well historically. Even if you somehow outsource it to an unbiased computer, who sets the weights? What's the relative value of an apple compared to an banana?
- CynicusRex 5y ago
  >"real world skills" is a nebulous concept. What counts as a "real world skill" and what doesn't? Got a sprain? Call a doctor. Leaking pipe? Call a plumber. Doesn't seem nebulous at all. Conversely, speculation and greed ruining the world? Call on the populace to bail them out. Speculation doesn't build or fix physical stuff. >You mean some sort of planned economy? Those have not worked well historically. Because historically it has been done on inferior computers. Whereas now we have the computing power to calculate the economy n-times over. Dr. Paul Cockshott on Cybersocialism: https://www.youtube.com/watch?v=LtlZys7QOO4 https://www.youtube.com/watch?v=LtlZys7QOO4. That being said, I'm sceptical as well; the video leaves many things unanswered which he expands on in his books that I have yet to read. However, I welcome any ideas on how to detach humans from having to deal with money, so we can collectively pursue more lofty goals, beyond profit.
  - cortesoft 5y ago

xiphias2 5y ago

Maybe a16z doesn't like it, but ,,buy and hold'' active investing works quite well. Passive investing means doing what your bank advisor suggests. People are starting to realize that those advisors may not make smarter decisions on where the world is going than the people themselves.

CarelessExpert 5y ago
That's not what "active" or "passive" mean in the investing context. Active investing refers to active equity or bond selection and investment with the goal of generating excess alpha (i.e. beating the market) Buying a traditional, managed mutual fund is a form of active investing. Passive investing involves buying a large, diversified portfolio of equities and bonds such that you hold a percentage of the whole market. This is "passive" because there's no attempt to select specific stocks. The goal is simply to match the market by owning a portfolio that's representative of the market. Buying an S&P 500 index fund is a form of passive investing. Both could be done in consultation with a financial advisor.
- xiphias2 5y ago
  Sure, you are right, but even with that definition somebody could have just bought Apple/Google/Amazon/Facebook/Tesla/ other high growth stocks/Bitcoin 10 years ago, and just waited. I see more of this kind of active investing happening (people reading Tesla blogs and going to meetups as an example, deconstructing software updates to see how the models are being ported 1-by-1 to the new framework. Financial advirsors generally don't do this in depth due diligents for products (or at least I haven't met any). As an example I read through a part of the Bitcoin source code to see how well it's written before investing in it, and I haven't seen any financial advisor who even looked at its github repo, and they already have opinion on it.
- nly 5y ago
  I mean it's a spectrum. If you put 100% of your wealth in SPY then you're actively choosing to disregard over half of the global investable equity market. Asset allocation is another active investment decision.

WalterBright 5y ago

One thing active trading does is subject you to much higher short term tax rates. You'll also lose a bit on the spread every time you trade, even with zero commission brokerage fees. The longest stock I've held is Boeing (40 years).

fnord77 5y ago
unless you're trading in an IRA
- WalterBright 5y ago
  Of course (though the spread will still hurt). But there's a limit on how much you can contribute to an IRA. A serious investor will find the IRA contribution limits make it inconsequential. You also wouldn't want to fund the IRA with money you'll need before 65.
  - fnord77 5y ago
    you can have millions in an IRA if you had rolled over past 401ks etc.

xyzelement 5y ago

I am a hedge fund guy who invests his own $$$$ passively so make of this what you will. There will always be a mix of active and passive. Fundamentally - passive only works when it follows smart active. Actives do expensive research and trade against each other to arrive at the consensus price. Passives trade at that price for "free." Since both get the same price on average but passives incur no cost, they win on average This breaks down if passives outnumber actives, or if actives are exceptionally stupid. Imagine 100% is passive. That means any stock in an index will be bought tomorrow and forever regardless of price. I could exploit that in a ton of ways. For example, do a "squeeze" (think of the recent GME short squeeze but in reverse.) Or, imagine company X will obviously default but stock keeps going up because passives are obligated to buy. Very easy to exploit by going active! Finally - think about this. Does your index fund have any GME? That part of your portfolio trades at the price set by Reddit apes. The more of that goes on, the more tempting it is to go "active" on the other side.

hehaheha 5y ago
That’s not quite right about passive and active though. It almost always resets every quarter (or other liquidity events). Passive introduced delayed price discovery and as a result greater volatility around earnings (or liquidity events). But over medium to long term passive vs active should not matter.
- xyzelement 5y ago
  Why isn't it "quite right?" I spelled out 3 scenarios that can play out and obviously will given the structure and incentives. Where do you disagree?
  - hehaheha 5y ago
    Because passive does not necessarily mean index. You can be passive and concentrated (see ARKK). And more importantly real world indices are moving target to begin with. They’re just very rough approximation of market basket. SPX is not representative of market as it relates to mpt at all. In fact that’s likely one of the biggest myths in modern finance.

m3kw9 5y ago

When ever a16 posts articles there is always bias to the companies they invested within. Long trade is definitely still around, just wait till everyone has other things to do

hehaheha 5y ago

It’s not resurgence of active trading. It’s a new brand of highly levered trading. We’ve never seen anything like it before. This was highlighted at institution level with Softbank last year and recently with Bill Hwang and Archegos debacle. And you see retail trading weekly options in high volume. Is it gambling? When was investment not gambling? It was always “informed” gambling with positive expected avg return. What’s the economic impact of this behavior though? I want to say it’s generally negative since it’s bound to grossly disrupt proper price discovery but was that even the case before this period of excess leverage? I doubt it.

jackcosgrove 5y ago

The only issue I take with this article is their seemingly blase take on the risky investing behavior of Gen Z. Sure, if that's the lay of the land then use it to your advantage. But it seems a bit predatory. Risky activities tend to hurt more investors than they help, and lead to a small number of big winners and many losers. You can't just increase risk and increase reward for everyone. Regarding the predicament Gen Z is in, just remember that the older generations - one of which is very large - will need to sell their assets at some point. I know it's hard to hear, "Be patient" when you are young and have already been patient, but demographics is working against asset values in the next twenty years or so.

SimonPStevens 5y ago
> demographics is working against asset values in the next twenty years or so. As someone who is about half way towards retirement, how is it best to work with this? My future retirement income seems to be mostly dependant on having the right selection of investments for my pension account to grow in time for when I stop working. It's currently split between a few low cost, broad indexes. But if we expect asset values to go down as older generations sell off, am I going to see this pension pot fail to meet what I need it to in order to cover my retirement. My pension advisor just seems to blindly follow the script of 'passive beats active', and expects 5% annual return. Which I just go along with, mostly because I have no idea what else to do. Am I being too pessimistic when I really can't see 5% return being likely. How do I go about making sure my retirement is provided for. It kind of annoys me I have to seemingly be constantly figuring out the market situation to make decisions on what's best. Why do I need to be a stock market expert to manage my pension. What I'd much rather do is pay for a future pension more like an insurance plan. I pay monthly now, and some experts who know what they are doing worry about the investment strategy, and I just get a fixed pension payment.
- prirun 5y ago
  It sounds like you want an annuity. Your returns will likely be lower, with the issuer taking the risk (and getting the higher rewards), but you return is guaranteed and the issuer's is not.

im3w1l 5y ago

My thoughts on passive investing have evolved a lot over the years. First I had a rather unsophistacted view of The Index, as a kind of benchmark you were aiming to beat. Then came an uncomfortable realization. There are multiple indices. Which one should you aim to beat and why? This question stuck with me and I didn't manage to resolve it at the time. Then I learned about the argument that active investors cannot beat passive investors because on average these two groups will hold the same stocks in the same proportions. The active investors are just trading stock back and forth and incurring fees in the process. This seemed logical and convincing at the time. A few years later I was trying to think on a theorethical level, how can active investors stand a chance against passive investors, if on average they hold the same things, and the passive investors don't incur fees? What I came up with was this: Stocks enter and exit indices. So even index funds have to do the occasional trade. If active investors as a group buy a stock before it enters an index, they can gain a leg up on the passive investors. Then I thought of something even worse. A bad actor could "poison" the index by founding companies. Trade a few stocks back and forth with a buddy to establish a high market cap. If it makes it into the index, the index funds have to buy from you.* Another thing that an index fund has to do is buy and sell when people enter and exit the fund, and when it does it has to trade with active investors. If active investors can predict in/outflows into the index-fund they can beat its cap-weighted**performance. Recently I've been thinking about the inclusion criteria for the index. This kind of ties in with all of the previous threads I mentioned and unifies them. Every index has a bunch of inclusion criteria, this is completely necessary and inescapable or else the poison problem becomes serious. Whichever index you choose, there will be some good companies inside and some bad companies outside. Thus there is no right index to choose. And here is another opportunity for active investors as a group, trying to beat the inclusion criteria of the index. Avoiding the poison better than the index funds. And picking good companies that didn't make it inside, and of course investments that are outside the index because it's in a different region, or because they are not stock at all. * This is a simple example. You could imagine a much more sophisticated scheme, with many different actors trading stocks back and forth, and mixing real companies in with the duds. ** An example to help the imagination: An index fund falls in value, almost everyone exit the fund. It recovers, people come back. Even though the fund is +-0, the average investor has lost money.

voces 5y ago

Passive trading is the only way to beat other players with more resources and information than you. As soon as you become a market-identifiable active trader, your behavior will be monitored and reverse-engineered. More power to retail investors to play along with the big players, and increased media hype --driven by vacuous memes and unclear-value-adding cryptotech-- giving more interest, only will unfavorably balance towards to the bigger players. I think the resurgance of retail stock trading in the last 2 years or so, is not due to the uncertain economy (again, only big players really benefit from market uncertainty), but because there really were few other places to put your money (negative interests rates, high gold prices, impossible real estate market) and the Fed printing money and keeping the market from collapsing, led to a fairly certain economy, where the Fed would garantuee your losses, but you could keep the wins. This top-down manipulation was obvious enough to trickle down to retail investors using RobinHood. In smaller, emerging, markets, quantitative active trading has become very competitive. Some markets, still profitable to active trading, are now beaten by a "mindless" passive trading strategy. Like stocks, it makes little sense anymore. Wallstreet bets is a non-regulated pump-and-dump group, in the upper echelons ethically worse than the owners of the biggest hedge funds (who won't take profit on some plays if they know it causes long-term damage to the economy, the economy being a matter of national security). The GameSpot play made a few of those a millionaire, lost the college funds of people too late to jump on the bandwagon, and done damage to the degree of billions, when hedge - and pension funds had to withdraw from solid businesses such as Google and Amazon, to cover the losses from this memetic war. You can also state that the drivers of the bandwagon, were doing a passive strategy spanning years. It is the active trading of the bandwagon that made their strategy worthwhile (and not a poorly-informed play based on nostalgia and potential). Numerai also is a passive investing (3 weeks+) fund. They are not that different from a hedge fund buying prop data. I do think the article is interesting, and adds information on a new emerging trend. But it also reads a bit too kind and objective, like a music journalist describing a new album she isn't a particularly personal fan of. Subtleties will be missed, while the overal picture still is objective and correct to the quality. As an investor myself, both active and passive, I progressed the most when I learned how the game is played at the top level. Active meme traders should do well to investigate these top players, just like these top players are studying them. RobinHood's order book is fed to the top players. They stand to gain by promoting this active retail trend, and taking near-certified profit on top of these predictable low-information emotion-driven masses. Buy things like Tesla or social media technology, which you as a 20-year-old, see using in 10 years. That's the way to beat the 35 year old senior Goldman Sachs analyst.

Animats 5y ago

"A combination of illusory superiority bias—the belief that we are more financially savvy than we actually are—and a culture of financial optimism leads most retail traders to believe they have above-average trading ideas and strategies." Um, yes. Retail investors as a class lose money. Remember, you're betting against people for whom this is their day job, work in a business that drops the losers, and have far more money than you.

01100011 5y ago
And 84% of the stock market is owned by the top 10%. I try to remind myself it's not my sandbox.
voces 5y ago
I see this as more favorable. With the internet, and with like-minded online communities, the average retail trader is way more informed and skilled than one 20 years back. The level of hubris may have corrected accordingly, not be based on illusiory superiority bias. Incorrect risk management from investment bankers, treating highly-variant finance as deterministic physics, and a fanciness of extremely smart people to invent extremely complex solutions, which obfuscate the ever-increasing assumptions and are less robust to black swan events. This illusory superiority bias over the common man, giving too much authority and decision-making power to a set of mathematical functions, and a culture of financial optimism and realization that you are too big to fail. This is what caused the big crash of 2007-2008. The common man, as a class, lost money from that crash. In response, Bitcoin and fractional stocks were introduced. New markets emerged, where wearing a suit or MBA seems a negative, not a value add. Now, as a class, you at least have the possibility to win money. Else you always lose (but maybe that's the natural way it is supposed to be, not everyone can be the queen ant, or has the adaptation capacity to become one). BTW: every hedge fund that opened their data to the public, saw better, more accurate, models being build on that, than any of their elite quants in-house was able to beat. The masses, when harnassed, are no match for even the biggest hedge funds.
deleted 5y ago
[deleted]

RickJWagner 5y ago

It reminds me of the investing environment just before the big crash of 2000. I remember going to my bowling league and hearing some guy talk about how he had just quit his job to become a full-time day trader. Apparently he'd been making money at it for months and figured he was a financial genius. We quickly saw that wasn't really the case. I believe in the Boglehead philosophy..

worker767424 5y ago

Remind me to put my money in Citadel and not a16z.

JohnJamesRambo 5y ago

I feel like passive Boglehead rules worked best because it existed in the period when America stacked the deck to make it where stocks always went up and everyone always wanted dollars. America left the gold standard in 1971 and Bogle introduced index fund investing in 1976. I wonder how successful it would have been without lots of unbacked dollars available for decades. I think we are reaching the end of that era. I guess we shall see.

worik 5y ago

Every generation, it seems, has to learn its lessons all over again.

Rury 5y ago

Frankly, I think passive investing has ruined the fundamentals of investing and in part responsible for the poor financial health of our economy. While the idea behind passive investing may seem like a good one, people often forget it's a double edge sword. By this I mean, when you invest into an ETF or index fund, that money in turn goes into everything underneath it. All too often that money isn't invested in the underlying equities in any intelligent way, and so some of it ends up in ridiculously bad equities. Because of this, there are complete zombie companies that are worth multi billions today, which sell no more than 2 widgets a year and haven't seen growth for nearly a decade... They are only worth so much because money keeps flowing into them from being apart of a hot ETF.

nradov 5y ago
Could you give us examples of those zombie companies? What are the ticker symbols and which indexes include them?
- Rury 5y ago
  NNDM is an example. Hasn't seen any growth despite having a marketable product over their entire 8 year timeframe. Worth ~2B right now despite only making ~3.4M in revenue per year and losing ~50M per year. All thanks, to becoming apart of ARKK.
  - superdimwit 5y ago
    ARKK is far from passive
    - Rury 5y ago
      Sure it is. The money you put into it is placed for you. That's passive. The fund itself may algorithmically place it in various things, but that's outside your control. Conversely, look at super undervalued companies like JKS and CSIQ. JKS is the largest and fastest growing solar company in the world BTW. Yet these companies sit mostly under foreign market ETFs which have never been very popular, and hence why they largely remain undervalued.

pmorici 5y ago

This seems to be conflating buy & hold with passive investing. What is it called when you don't invest in index funds you pick stocks and then buy and hold them for the long term? Seems to me there is passive and active investing and the opposite of buy & hold is day trading. I'm also not sure that I buy the argument made elsewhere in this thread that you need active to make passive work. Indexes upon which funds are based often have a system of rules for how individual stocks are added and removed from the index that are based on the companies financial performance which is what ultimately drives the stock.

jackcosgrove 5y ago
> What is it called when you don't invest in index funds you pick stocks and then buy and hold them for the long term? It's not so much about time-frames but rather familiarity with the details of a company or sector, but the term you're looking for is probably value investing.

Black101 5y ago

If I make 20% in one day, I will be active, otherwise, I will be in between passive and active.

LatteLazy 5y ago

>Active investing is a natural extension of hustle culture The sad thing is I think this is true except that far fewer active trades than hustles make a profit...

tim333 5y ago

It's not really mentioned in the article but the rise of speculative trading is fairly normal at the end of a bull market. People see their friends stocks have gone up and figure they can get in on that too. (Jeremy Grantham going on about such stuff https://youtu.be/RYfmRTyl56w?t=195 https://youtu.be/RYfmRTyl56w?t=195)

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kbos87 5y ago

I have no doubt that active trading is seeing a resurgence in interest driven by apps like Robinhood that make it easy to do. But I’d be willing to bet that the returns active traders as a whole are just getting are worse. Public is an interesting place where you can see behind the curtain of who the folks using these services actually are and what their logic is. (Trades on Public are visible to everyone by default, and it’s basically a giant message board.) Five minutes in and you’ll see that 98% of the activity looks a lot more like gambling than anything that might be driven by a plan or strategy. That’s fine and I don’t say that to disparage Public’s users, but it’s important to be realistic about what’s going on here. I believe Public also encourages/seeds the community with celebrities and “experts” / quasi-influencers who are clearly trying to make a name for themselves on the platform. Some of them share basic advice, while others drive short spurts of mania based on their investment decisions. Watching it all play out has solidified in my mind that active investing is a losing game all around.

user743 5y ago

All these sophisticated comments and no one has mentioned that the stock market has turned into a giant scam since companies stopped paying dividends either completely or reduced them to a meaningless amount. Stocks have zero intrinsic value without dividends.